“The only thing that matters is getting to product/market fit”—Andy Rachleff’s corollary of startup success (as coined by Marc Andreessen)
Perhaps the single most common piece of advice given to growth-hungry entrepreneurs—by investors, mentors, and even professors—is that the singular focus for any startup should be achieving product-market fit (PMF).
Popularized by venture capitalist Marc Andreesen, PMF captures the notion that the ability to create and capture value from an innovation depends on iterative learning and experimentation to find a magic combination of customer and product. Among the endless number of markets that a startup might enter, and the endless number of products that an entrepreneur might offer, finding the right product for the right market is the most critical task of an early-stage startup.
But if getting to PMF is so important, why is achieving PMF so rare?
The failure to find PMF is not because entrepreneurs have bad ideas (or because they lack access to capital). Exactly the opposite. Tens of thousands of entrepreneurs each year are able to identify opportunities that at least in principle might be able to create meaningful value for customers. And a substantial number of those entrepreneurs are able to attract a founding team and seed stage capital to explore their idea in their search for PMF.
However, and perhaps counterintuitively, our research suggests that it is precisely because they are pursuing a potentially valuable idea that the search for PMF can be so challenging. Specifically, many entrepreneurs (and even mentors and investors) seek to achieve PMF by finding the “best” market for their product (or the “best” product for a given market); the search for PMF becomes an almost grail-like quest in which founders iterate and experiment toward an epiphany as to the one true path for their venture.
This approach contains a subtle yet critical logical error about the nature of entrepreneurial ideas.
A good entrepreneurial idea is simply a hypothesis that there is the potential to create and capture value by introducing something that is currently missing from the marketplace. The hypothesis may be about the ability to fill a small hole or open up a new vista. It may be something that is well-known but not yet implemented in a particular location or market segment, or it may be something that others have discounted until it was actually offered.
In all of these situations, there are many potential paths to value. While a good entrepreneurial hypothesis is “contrarian” (or else someone else would have already pursued it!), there will be many alternative ways to implement it if the underlying hypothesis is indeed true.
What are the characteristics of a good startup idea?
Rather than being limited to a single path forward, the signature of a good idea is that the entrepreneur will be able to identify multiple potential ways to make it work.
For example, when then-MIT Sloan student Elliot Cohen and his Pillpack co-founder TJ Parker identified a new approach to pharmaceutical packaging designed for patients taking multiple medications, they quickly recognized that their idea could be implemented in a number of ways. They could choose from different patient groups that could serve as beachhead customers (for example, those with the most medications, or those with only a few). They could envision different paths to commercialization, serving perhaps as a complement for traditional players such as CVS and Walgreens or positioning themselves in a way that established them as potential competitors to these pharmacy incumbents. When one of us wrote a case study on Pillpack in 2013 (before they became successful), it was much easier to identify potential paths forward than it was to choose among those paths to achieve PMF.
But just because there are multiple potential paths to value does NOT mean that a startup can pursue all of these paths simultaneously. Founders have limited time and money, and, critically, not all the available paths are consistent with each other. For example, the types of choices that Pillpack would have needed to make if it decided to collaborate with established pharmacies were meaningfully different than the types of choices made if their goal was to disrupt the pharmacy business through an online, customer-focused model.
So, how can a startup choose a path to achieve PMF when there are multiple paths to value?
Our research and teaching focus on establishing a systematic, choice-oriented approach for identifying multiple paths to value and then proactively determining a path forward. Using our framework, founders first surface multiple alternative paths and then undertake a process of iterative learning and experimentation that does not yet commit them in a given direction (we call this process of surfacing multiple alternatives “test two”). But it is precisely when the startup has identified multiple (and potentially incompatible) paths forward that founders need to “choose one.”
Strategy for startups involves choosing a path that leaves other potentially valuable paths behind. In the case of Pillpack, Cohen and Parker undertook critical choices that placed them in opposition to the traditional pharmacy industry, but also made them an attractive candidate for partnership with companies that had yet to enter that industry, reflected in their acquisition in 2018 by (and subsequent scaling with) Amazon.
The “test two, choose one” approach not only enables founders to achieve product/market fit, but also to align the direction of their startup with the impact they would like their venture to have on the world.
The authors have a forthcoming textbook from Norton, with materials available for instructors at entrepreneurial-strategy.net. Their new two-day course at MIT Sloan Executive Education, Strategy for Startups, will be offered live online in September and November 2021.