The Only Thing That Matters for Startups Is PMF | Z Talk

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In 2007, a16z co-founder Marc Andreessen first introduced the concept of PMF, defining it as "being in a good market with a product that can satisfy that market." In his essay, he skipped past "team" and "product" to argue that "market" is the most important factor in determining a startup's success or failure.

Fast forward to 2024, and the environment for AI entrepreneurship bears some resemblance to that era. PMF seems to have once again become the "first principle" of entrepreneurship. Perhaps it's time to dig this article back out and think about what truly matters for startups.

Below is the original essay. We hope it offers you some food for thought.

This essay focuses on: the only thing that matters for a new startup.

Let's start with some theory:

If you look at a large number of startups—30 or 40 or more, enough to filter out the pure flukes and start to see patterns—two obvious facts emerge.

The first obvious fact: Startups vary enormously in their outcomes—some are incredibly successful, some highly successful, many fairly successful, and a significant number are outright failures.

The second obvious fact: Each startup's three core elements—team, product, and market—vary enormously as well.

At any given startup, the team can range from outstanding to terrible; the product can range from an engineering marvel to nearly unusable; the market can range from booming to comatose.

So you start to think—what correlates most with success? Team, product, or market? Or more bluntly, what causes success? And for those who study startup failure, what's most dangerous: a bad team, a weak product, or a poor market?

Let's define our terms.

The quality of a startup's team can be defined as the suitability of the CEO, senior staff, engineers, and other key personnel relative to the opportunity at hand.

You can look at a startup and ask: Is this team optimally suited to exploit the opportunity they face? I focus more on effectiveness than experience, because the history of the tech industry is full of highly successful startups built by people with no experience.

The quality of a startup's product can be defined as how impressive the product is to a real customer or user who actually uses it: How easy is it to use? How feature-rich is it? How fast is it? How extensible? How polished? How many (or how few) bugs?

The size of a startup's market is the number and growth rate of those customers or users for that product.

(For the purposes of this discussion, we assume you can make money at scale—your cost of customer acquisition won't exceed your revenue from that customer.)

Some people object to my categorization: "How great can a product be if nobody wants it?" In other words, isn't the quality of a product determined by how appealing it is to lots of customers? No. Product quality and market size are completely different concepts. It's the classic scenario: the world's best software application running on an operating system nobody uses. Just ask any developer who built applications for BeOS, Amiga, OS/2, or NeXT to understand the difference between a great product and a large market.

So:

If you ask entrepreneurs or VCs which is most important—team, product, or market—many will say team. This is the obvious answer, because in the early stages of a startup you know a lot about the team and very little about the product and market, since the product hasn't been built yet and the market hasn't been explored.

And we've been conditioned since childhood to believe that "people are our most important asset"—at least in the US, this people-centric philosophy is deeply embedded in the culture, from high school self-esteem programs to the Declaration of Independence's emphasis on the inalienable rights to life, liberty, and the pursuit of happiness—so "team is most important" sounds right.

Who wants to be on the side of arguing that people don't matter?

On the other hand, if you ask engineers, many will say product. This is a product-driven industry; startups invent products, customers buy and use products. Apple and Google are the best companies in the industry today because they make the best products. No product, no company. Imagine having a great team with no product, or a great market with no product—you'd wonder what went wrong. We should keep coming back to product.

But I personally take the third position—I believe that market is the most important factor in a startup's success or failure.

Why?

In a great market—a market with lots of real potential customers—the market pulls product out of the startup.

The market needs to be satisfied, and the market will be satisfied by the first viable product that comes along. The product doesn't need to be great; it just needs to basically work. The market doesn't care how good the team is, as long as the team can produce that viable product.

In short, customers are knocking down your door to buy the product; your main job is to answer the phone and respond to all the emails from people who want to buy.

When you have a massive market, it becomes very easy to upgrade the team rapidly.

This is the story of search keyword advertising, Internet auctions, and TCP/IP routers.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter—you'll fail.

You'll spend years looking for customers who don't exist to pay for your amazing product, your great team will eventually lose morale and quit, and your startup will die.

This is the story of videoconferencing, workflow software, and micropayments.

To credit Andy Rachleff of Benchmark Capital for summarizing this formula for me, I call it "Rachleff's Law of Startup Success":

The #1 company-killer is lack of market.

Andy puts it this way:

• 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.

You can obviously screw up a great market—and that is not uncommon—but assuming the team is baseline competent and the product is baseline acceptable, a great market tends to equal success, and a poor market tends to equal failure. Market matters most.

Neither a stellar team nor a fantastic product can redeem a bad market.

So what do we do about it?

Question #1: Since team is the factor you have the most control over at the start, and everyone wants to have a great team, what does a great team actually get you?

Hopefully a great team gets you at least an okay product, and ideally a great product.

However, I can give you many examples of great teams that totally screwed up their products. Building a great product is really, really hard.

Hopefully a great team also gets you a large market—but I can also give you many examples of great teams that executed brilliantly against terrible markets and failed. A market that doesn't exist doesn't care how smart you are.

In my experience, the most common case of a great team with a bad product and/or bad market is in second or third-time startups. The entrepreneur's first company was a huge success, so they become overconfident and screw up. There's a very prominent and successful software entrepreneur today whose latest startup burned through about $80 million in venture funding with almost nothing to show for it but some good press articles and a handful of beta customers—because there was virtually no market for what they were building.

Conversely, I can give you many examples of weak teams whose startups were very successful because they happened to be in massive markets for what they were doing.

To close with a quote from Tim Shephard: "A great team is a team that will always beat a mediocre team, given the same market and product."

Question #2: Can't great products create huge new markets?

Absolutely.

But that's the best-case scenario.

VMWare is the most recent company to have done this—VMWare's product was profoundly transformative from the start, and it spawned a whole new movement in operating system virtualization that turned out to be a massive new market.

Of course, in this scenario, your team doesn't need to be that exceptional—just good enough to develop the product to baseline market-required quality and get it out the door.

Please understand, I'm not saying you should lower your standards on team quality, or that VMWare's team wasn't strong—they were and are very strong. I'm saying that bringing a product as transformative as VMWare's to market, you're going to succeed.

Beyond that, I wouldn't count on your product to create a new market from scratch.

Question #3: As a startup founder, what can I do?

Let's introduce the corollary to Rachleff's Law of Startup Success:

The only thing that matters is getting to PMF (Product/Market Fit).

PMF means being in a good market with a product that can satisfy that market.

When PMF isn't happening, you can always feel it: customers aren't getting value out of the product, word of mouth isn't spreading, usage isn't growing fast, press reviews are kind of "blah," sales cycles take too long, and lots of deals don't close.

When PMF is happening, you can always feel it: customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add servers; money from customers is piling up in your company checking account; you're hiring sales and customer support as fast as you can; reporters are calling because they've heard about your hot new thing and want to talk to you about it; you start getting Entrepreneur of the Year awards from Harvard Business School; investment bankers are staking out your house; and you could eat for free for a year at Buck's.

Many startups fail before PMF ever happens.

In fact, I believe they fail because they never achieve PMF.

Further, I believe that the life of any startup can be divided into two parts: before PMF ("BPMF") and after PMF ("APMF").

When you're BPMF, focus obsessively on getting to PMF.

Do whatever is required to get to PMF. Including changing out people, rewriting the product, moving into a different market, telling customers yes when you don't want to, telling customers no when you do want to, raising that fourth round of highly dilutive venture capital—whatever is required.

When you get right down to it, you can ignore almost everything else.

I'm not suggesting that you do ignore everything else—just that from what I've seen in successful startups, you can.

Whenever you see a successful startup, you see one that has achieved PMF—and usually along the way screwed up all kinds of other things, from channel model to product development methodology to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.

Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-out marketing plan, great interview process, outstanding catered food, 30" monitors for all the programmers, top-tier VCs on the board—and they're heading straight off a cliff due to never finding PMF.

Ironically, once a startup is successful, when you ask the founders what made it successful, they will usually cite all kinds of things that had nothing to do with it. People are terrible at understanding causation. But in almost every case, the real cause was PMF.

What else could it be?

Note: This article is excerpted from the fourth in a series. The full 30,000-word essay can be found here: a16z Founder Marc Andreessen's Guide to Startups: One of the Best Essays on Business and Entrepreneurship

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