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Sequoia’s Jess Lee explains how early-stage startups can identify product-market fit




Sequoia's Jess Lee explains how early-stage startups can identify product-market fit

Founders who are in the early stages of building their startups may have already created a strong solution, identified a gap in the market, or simply have an inescapable and driving motivation to build their own business. Ideally, they have a good combination of all three. But do they have a product-market fit? And what actually is product-market fit?

The investors at Sequoia, one of the largest venture capital firms in the world, have come up with a very useful framework to answer these two questions. It distills the landscape into three archetypes.

“Hair on Fire” roughly means that your startup is tackling an urgent problem. For example, a security startup could be in place here, especially if it can bring in some initial revenue thanks to parachuting in to fix a leak or other problem already in progress. Or consider the wave of companies offering services to businesses and users when they were suddenly sheltered in place and working from home during the peak of Covid-19.

“Hard fact” translates as a startup that solves an existing problem better than what is already there. Square, which emerged as a new point-of-sale product in a seemingly old and saturated market, is a good example.

Finally, “Future vision” covers deep tech, moonshots and products out of left field. This includes quantum startups, as well as companies building flying cars or even autonomous vehicles that will drive on our roads (or whatever technology will be needed to create such vehicles).

Each of these archetypes has its own customer mindset, competitive market status, opportunities/overall product goals, challenges, examples of those who got it right and those who didn’t, and so on. Sequoia partner Jess Lee, a specialist in early-stage investments, gave a major talk on the concept at JS’s Early Stage event in Boston in April. Sequoia has written about the framework hereat.

In summary, the theory goes like this: Startups all fit more or less into one of these three archetypes, so identifying which archetype fits a company can help it focus and develop.

Sequoia is confident enough in the structure that it uses the framework in its system Arch program to help early-stage founders focus on how they build. It also helps the company evaluate potential startup investments. Additionally, and just as important, founders can lean on an archetype to better anticipate and articulate the challenges and opportunities in their space. This can of course be useful for internal decision-making, but also for fundraising or pitching partnerships or customers.

During her presentation on the framework, Lee said that Sequoia does not have a favorite category of the three.

“I I think you can create great companies in all these categories,” Lee said. However, she admitted that certain types of companies could find it particularly difficult to raise money in the current climate.

For deep tech and moonshots – two common types of startups found in the ‘Future Vision’ category – fundraising “It was easier in a period of zero interest rates, when there was a lot of capital flowing in,” Lee said. ‘I do not know if [those companies] could have raised just as much [starting out now] as it took to get to where they are today.

Lee co-founded Polyvore, which combined social mechanics and e-commerce. The users contributed fashion and product clips from the internet and used those products to create mood boards, using affiliate marketing as a basis. Polyvore was eventually acquired by Yahoo and she parted ways with it. Still, that e-commerce and consumer focus has stuck with her, she said, adding that she’s still interested in finding new winners in that category despite the challenges of making it in the industry today break.

“It’s still possible,” she said. “I feel like a lot of consumer companies fall into the ‘Hard Facts’ category, and I especially enjoy working with consumer companies. But you have to be good at marketing your problem as well as marketing and building your solution. So it takes a lot to get it right.

“It almost feels like alchemy. I can’t tell you how many founders I’ve met who said, “Oh, yeah, I worked on Snapchat too. For example, I had my own version.’ And it sounded like it was similar, but the right amount of detail allowed Snapchat to be the one that broke away.”

None of this is to say that the third category, “Hair on Fire,” is exactly easy. “You must execute ruthlessly,” Lee said. “[You need] so much speed to stay ahead of everyone.

Her conclusion highlights one of the most critical aspects of building an early-stage business. “I think there’s a little bit of ‘founder-market fit’ in each of these product-market fit categories.”