The #1 Key to a Startup's Success (Classic)

What's up, everyone. This is Alex Lieberman, co-founder and Executive Chairman of Morning Brew. Welcome back to Founder’s Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. In today's classic episode, which was originally released on November 8th, 2021, I talk about the most important thing to get right as a startup founder. Let's hop into it. 

Three key elements of a startup

So with any startup, and any company for that matter, there are three key elements that make every company similar: the market, the product, and the team. And what I want to talk about is what an exceptional team, product, and market look like, and which is most important to get right with any early stage company. I also want to first say that this episode was inspired by a 2007 blog post by Marc Andreessen, who is one of the greatest startup investors of all time. So if you want more background on what I'm talking about, I've linked to the original post. Let's start with a great startup team. What is a great startup team? Very simply, it is a team that is comprised of founders, senior leadership, and key people who have the skills and chemistry necessary to accomplish the vision of the startup full-stop.

And so when you talk about something like founder-market fit, this is generally what it's referring to. How well does the founding team fit the opportunity that the team is going after? Now, once we've talked about great team, we can talk about great product. And a great product is all about asking, is the product great in the eyes of the beholder (which means the customer)? Simply, how impressive is the product to the customer and how much better is the product for the customer then their alternative choice? So let's use a real example. How much better was the iPhone or the personal computer or the Peloton or Netflix when they got into streaming than the alternative? We're talking 10X better, maybe 100X better.

And then finally you have a great market. And a great market is one in which there are many hungry customers for your startup’s product and the rate at which that number of hungry customers is growing is very, very fast. A great market is a big passionate market. That's getting even bigger quickly. So now I have a question for you: If you want to maximize the probability of a startup’s success, and you can only optimize for one thing—Team, product, and market—which one are you choosing? I'm going to pause and let you think about it.

Now, once you've locked in your answer in your head, email me with what you chose and why. Just alex@morningbrew.com. I want to hear what your choice is. Now, let me tell you how I think about it and how my thinking has evolved over time, especially after reading Marc Andreessen's posts. For the longest time, I believed the most important component of a startup is its team, hands down. The quality of your product is only as good as your team. So at Morning Brew, if we didn't have amazing writers, we wouldn't have had a differentiated product that now millions of people read.

Why you need a good market

And on top of that, your ability to learn and adjust is only as good as your team. Why do Amazon and Google and Netflix continue to dominate in their respective industries? Because they have the most talented people in the world. I still believe that team is absolutely vital, but I've recently taken a more nuanced approach based on the blog post by Andreessen. Marc goes on to say that the most common answer to the question I just asked is team, which is the answer I just gave you. And he said, it's the most common answer for a few reasons. One, because team is most in your control as an entrepreneur and you know the most about your team when starting a company. You know, a little bit about the market, you know very little about the product, but you know most about the team because you've put together the team. Second, we've been taught in our culture, in American business culture and startup culture, to value people and team over everything else. And at the same time, we are taught to feel icky if we don't say that people are the most important thing in building a successful startup. It's almost frowned down upon. It's thought of like, we're not empathetic leaders if we don't say people are the most important thing. But what Marc argues, you know, seeing thousands of startups both succeed and fail that he's invested in and not invested in, is that nothing is more important than a startup’s market. Not its team, not its product: its market.

He says a market that’s fast growing, that has a ton of potential customers, will pull forward any startup. And you don't have to look far to find evidence of this. So last week I spoke to a startup that has created a wallet where you can store your crypto, specifically Ethereum and NFTs, non-fungible tokens. And they've been working on this company since 2019, but in the last year, in 2021, the company has 100X’ed its user base. This is the definition of a large-getting-larger market. The market cap of Ethereum, which is the cryptocurrency that the wallet focuses on, has 27X’ed in the last three years.

And the NFT market in the third quarter of this year was 30 times larger than the entire market in all of 2020. Now this doesn't take anything away from the amazing entrepreneurs who built this software wallet, but simply by serving a need well enough in a market where the number of customers has grown by orders of magnitude, the company has been pulled into a hyper-growth mode and in a hyper-growth market, the product doesn't need to be great. It just has to work. It has to adequately solve a problem that is new for hundreds of thousands or millions of people. Because in a fast-growth market, the urgency of customers is so much higher than in a small, slow-growth market that customers will basically force you to put out a product that serves their needs.

If you have a good market, you’ll find a good team

And also when you're in a great market, a great team becomes a sort of self-fulfilling prophecy. You see, the smartest people want to work on the biggest, most interesting problems. And that generally correlates with the markets that have the largest opportunity. So you're naturally going to attract top talent. And at the same time, like I was saying before, you're likely going to see success in a great market, even if your product isn't great yet. So employees are going to want to join your company because of the success they're seeing, even if your product isn't best-in-class. Then let's think about this on the flip side. What about if you're in a bad market? You can have the best team, the best product, but if it is a terrible market, you will fail.

Why? Because you could build a great product, but if you don't have customers that are yearning for a product to satisfy their need, it doesn't matter how great your product is. It doesn't matter how smart your engineers are. You're not going to attract demand. The first company that comes to mind when I think of failure because of a bad market is Magic Leap. Magic Leap is one of the most high-profile, augmented- and mixed-reality companies in the world. It's been around since 2010, it's raised $3.5 billion, and it feels like the company that has never found product-market fit, but somehow has stayed alive. Everything about Magic Leap from a team and product perspective is wildly impressive.

The company is run by former Microsoft VP Peggy Johnson. It's attracted some of the smartest engineering and design minds in the world. And if the product is capable of what the commercial show, it's truly making augmented reality an immersive and unbelievable experience. Yet the company has not found product-market fit. It is not succeeding. It's burned billions of dollars on R&D. It had to fire a large number of its staff, including its founder, Rony Abovitz, and the most recent raise pegged Magic Leap at $2 billion in value from its peak of a $6.7 billion valuation.

Why is that? Because the market isn't there. For decades, technologists have talked about the possibility of AR and VR for business and personal use and possibly with things like web 3.0 and the metaverse, we're starting to see glimpses of these technologies becoming a reality in everyday society. But unfortunately for Magic Leap, the market hasn't been there yet, and the company has paid dearly. It comes down to a very simple law and it's Rachleff’s Law of Startup Success. And the law says that the number one company killer is lack of market. The market always wins. When a great team meets a lousy market, the market wins and the company fails. When a lousy team meets a great market, the market wins and the company finds product-market fit, despite not being a great team. And when a great team meets a great market, the market wins and the company finds a special type of success. Marc Andreessen put it best in his post with this line: Markets that don't exist don't care how smart you are. So where does all of this leave me thinking about what's most important in building a startup, between product, team, and market? Well, as an entrepreneur, it has me thinking far more about market than I used to. I think I honestly took for granted with Morning Brew, our market.

We got very lucky that the market for newsletters accelerated in the years after we launched, but that was neither a given, nor was it planned. For those of you who may be saying, but look at Airbnb or Peloton or Uber, they created a market, a market wasn't there and they did so by creating an incredible product, so is a product more important? Well, not exactly. Sure, you can create a product that creates a whole new market, but I'd argue since all of these businesses that I just named are once-in-a-generation businesses, that it is significantly harder to create a product that creates a market, then join an existing market that is already showing great promise.

Two caveats

There are two holes I do want to poke, though, in the importance of the market argument. First, oftentimes big and exciting markets seem very small and unexciting, whether that be crypto or personal computers, but by joining the market early, when it's not exciting, it can oftentimes create an advantage for the businesses that dedicate themselves to that market earlier than everyone else. Second, big and exciting markets, if they are already big and exciting, will inevitably attract far more competition. That's just what capitalism does. And what that means is product and team excellence need to be greater than what I think Andreessen emphasized in order to win in a hyper-competitive space. All this to say that I think market is most important, but team is right up there with it.

And finally, what does this mean for you? Well, if you're a founder, be thoughtful about the market that you pick. Be more thoughtful than my co-founder and I were when we started our company, and be relentless about getting to product market fit once you feel good about the market. And if you're an employee, whether junior or senior, make sure to think really, really hard about the market of the company you're joining, especially if you're joining a pre-product-market-fit startup. It is going to be so easy to focus on the founder and the founding team, because we're taught to join companies where we believe in leadership. And I generally agree with that mental model, but if leadership is building a product in a shitty market, it doesn't matter how great of leaders they are. 

I want to hear from you

As always thank you so much for listening to Founder’s Journal. Don't forget to write in with your thoughts on how you would order product, market, and team from most important to least important. Shoot me an email at alex@morningbrew.com. Also make sure to pound the subscribe button for Founder’s Journal, whether it's on Apple, Spotify, or the podcast player of your choice. That is the number one way to grow the show and for you to find out about new content when it comes out. And if you already subscribe, make sure to check out Founder’s Journal content on Morning Brew’s YouTube channel. Go to YouTube, search Morning Brew, and click on our channel. There, you will see an entire playlist of Founder’s Journal content, from how to deal with imposter syndrome, to why Ethereum matters. And before we go, a shoutout to the entire team that helps makes Founder’s Journal possible. Our show is produced and engineered by Dan Bouza. Our associate producer is Bella Hutchins. Brian Henry is our executive producer. Holly Van Leuven is our fact-checker. Emily Milliron is our video producer and editor. And I’m your host, Alex Lieberman. Thanks for listening and we’ll catch you next episode.