The Legend of the Market Pull
Updated: May 11
Two weeks ago, I had dinner with one of the early investors in one of the leading crypto exchanges. We discussed how the industry was just stumbling forward for the first couple of years until when, in 2016/17, the activity suddenly exploded. It is a good reminder that no matter how good your execution is, you will not be growing exponentially without a market actively looking for your product.
Another recent analogy is the space industry in Europe. Dominated by public players since the dawn of time, one big commercial European player, Porsche, finally announced two weeks ago that they would heavily invest in the next years into their space infrastructure. Does this mean that the private market is finally ready to adopt the new space tech infrastructure? I think so, but it will take another 2-3 years until it really takes off in Europe.
Team, yes, of course, but the market is king…
I tend to adopt more and more a product market driven investor framework. The team is key, of course – without it, we won’t go anywhere. But people are not the sole most important thing; the market is. Andy put it well:
In other words: Does the product make sense for the market? Does the market seem like it could be big in some form or another? Are there some signs that this thing will get traction? The hook is that these hot markets are not obvious at all. As an early-stage founder and investor, it is the bet we are making. Therefore, before backing a new venture, we always discuss with the entrepreneurs the following three questions (more on them in this post). Let’s deep dive…
People are the foundation to build a venture growth business. We have all seen these cases where singular individuals build businesses that are bigger than what others would build in a similar situation. A good example is Stripe (valued at $90B+, raised $2B+) and Braintree (acquired by PayPal, raised $70M). Both are amazing companies, and both were in a market that experienced an enormous pull that allowed them to grow extremely fast early on. But the Stripe founders and their team are special. This is the reason why Braintree ended up at a very different place than Stripe while both pursued the same market.
In my young venture career, I have seen many early-stage teams that were great executors, but where the thesis on the market was just not right. There is nothing wrong with this; it is the nature of hunting outlier opportunities.
I have been lucky to have witnessed a couple of teams that hit a market with a strong product need. They got the product right, hit some good marketing channels and/or distribution channels, and BOOM! Both teams were equally good; one just got luckier than the other... As with the example of the crypto market at the beginning of this post, often it is just timing, sometimes, the thesis is wrong altogether, and the market never really picks up.
So, what is a great market?
A great market is one that carries you forward quickly, like a great wave when surfing. Sometimes you just catch this perfect one. It lifts you up (market pull), and if things go well (execution), you can ride it for a long time (market size)…
Market pull and traction are relatively easy to detect when happening. Evaluating the size of a market can be difficult, though. Sometimes it is fairly straightforward (think of Wix, K Health, etc.), but it is often unclear what the product will evolve into in the next months...
TAM (total addressable market) is tricky way to evaluate markets, though. ‘How many people could be interested in this product?’ It is just difficult to extrapolate what these young companies can become. In fact, it often seems that they go after relatively small markets (think of Uber, Flo).
Growth rates seem to be a better proxy for evaluating market sizes. I often look for early signs. When something is compounding fast (focus on a core metric, e.g. customer pipeline and conversion, engagement, users, etc.), it suggests that it is in a very big market, even if you don’t think it is, at first. If a company is growing 20% a month, every 4-5 months you double… this is only possible if many people are looking for this solution, as much of the growth has to be organic at the early stage. Often the company discovers new and/or bigger use cases for its product than initially intended. Alternatively, if something is growing slowly, it is usually because it is in some smaller market, the product is not quite right yet, or the company has not yet found the right way to reach its target customers/distribution. Here are some interesting growth rate benchmarks that Lenny collected from 25 different venture investors:
So, if you are in a good market, it will pull you up, beyond what perhaps some teams deserve… Some of our companies, for example, just figured out to get some impactful visibility early on. The speed at which their pipeline fills up with quality inbound deals is just mind-blowing. They literally are not able to take care of all of them. It is this product market side fit that gets you from 0 to a 500M or 1B company quickly, and in some cases even bigger if the trend continues and execution follows. This is also why there are companies out there that are not let by the greatest executors but are billion-dollar companies. But some of these companies should have been much bigger even. That’s the difference between an A+ team and a regular team.
What makes this ‘great market selection process’ so difficult is that markets that display these pull characteristics are often not obvious. If it was obvious, many other people would have gone after it. The funny thing is that, sometimes, these markets look small, or competitive with similar products already out there, but with the wrong product approach. So, is it only possible to build venture-like growth when there is a market pull? Well, it is much, much easier, but here comes a second key element - everybody needs to innovate continuously…
The importance of innovation since day 1
Aaron Levie, the founder of Box, said that one of his top regrets was not going multi product earlier. Every great wave starts slowing down and will come to an end. So, you have to make sure you catch the next one quickly.
The best companies I have worked with have been innovating since day one. They quickly come out with a product extension (or product two), most of the time an adjacent product to their core offering. Once their product is scaling (that means to a couple of millions in revenues or a couple thousand users), they are already, besides building up their distribution and/or sales machine, listening to their customers to understand what to do next. On the other hand, others never really come out with a product two, or very late on. If you think about it, the company that starts innovating early, tends to innovate later on as well. It is part of their DNA. On the other hand, the companies that tend to innovate late, never really innovate. It is a pattern that you can see over and over again.
A great example is the Covid market pull. Many companies have exploded after March 2020 as they suddenly had a product that the entire world was looking for. Besides supporting the sudden scaling of their businesses, these companies had another big challenge – ship products that will drive continued growth, also when people go back to the office. It will be interesting to watch which ones were able to do so in the next months.
This is a contrarian take as most investors tell you that you should focus on your core no matter what. But the truth is that you have to build that innovation muscle early on. And some teams just have it from day one, and others never train it…
Let’s look at a non-tech example to illustrate this need of growth by innovation. Why did Coca-Cola enter the bottled water market? They used to only look at their market share in soda. Look, we are at 60% vs. Pepsi etc., and we are doing great. But the growth in this market is capped. Yes, you can expand geographically and launch various versions of soda. But ultimately, you will hit a ceiling, and growth will continue to decline. But, what if you look at beverages in general? Water, juices, etc. You can easily leverage the brand and operational power in multiple verticals. It turned out that they were tiny in these markets. By redefining the market, they redefined their strategy, and could boost growth again, through M&A and new products launched…
Google is another great example. Think about Gmail, google news, chrome, etc., and its multiple acquisitions such as youtube, google maps, android, etc.
So, it’s a question of when, not if, you’ll go multi-product. Jason dropped some great insights on this. His lessons from looking at a bunch of companies are that if you can sequence in a new product by year 3-5 that’s material, that will be the fuel for future growth. At least, you’ve got to have a testing strategy here well before $30m-$50m ARR. Probably by the time you are halfway there. Roughly, very roughly, you want to be multi product in SaaS by the time you have 10,000 customers. For enterprise, this could be $30-50m in ARR. For SMB, it could be $10m-$30m in ARR. Freshworks, for example, was truly multi-product with SMBs at about 5,000 customers. Its first major addition was FreshService - which it added as it approached 10,000 customers and about 4 years into business.
Amplitude’s product updates are also a great example of what type of product extension to go for. It was tempting to attack a different buyer, but this strategy failed. Selling an additional product to their existing, happiest customers worked well. They accessed more budget from them. The latter is an important point. If your customers love you, they’ll often buy more from you. Hunting new buyers for a new product can make sense in theory, but in practice, it’s probably too large a burden on sales and marketing.
This week I was in Israel. It was such a pleasure to see all our local founders and partners in person again. Here a picture of our Mangrove founder drinks.
Life is awesome,
Other content I've found useful
- Great thread by Samir on how to read the current fundraising announcement by venture firms
European VC Europe