That is one dysfunction for founders of the current market. This unfortunately combines with another trend to completely confuse first-time founders. For a long time, firms have paid attention to each other’s bets. Often when a firm wants a deal and doesn’t get it, it will turn around a couple of months later and fund the next round for that company at double or quadruple the previous valuation. For PMF companies, this makes a little sense because the market risk had been removed from the company and you could make a rational TAM and execution risk calculation to justify paying up.
However, what has happened in the last year is that the early seed deals triggered this momentum effect. So you see one firm do the seed for optionality and another firm turn around and do the Series A at 2–4x valuation three months later. And I’ve seen several series B’s now of pre-PMF companies where two momentum bets have happened. These are often perpetrated by junior partners at firms who see the momentum and want to jump on board and make their name. One might think this is all good for founders because now they may have $30m in the bank raised at a $200m valuation. What’s not to love?
The problem is that now you have a pre-PMF company with $30m in the bank and very high expectations. For serial founders who have seen this before, it’s no problem at all. They stick to that team of 6–15, experimenting furiously until they find PMF and telling their investors to come back in a year. But our industry is built on new founders. And now you combine inexperienced founders with inexperienced partners at firms hoping to build their reputation.
And the place this all comes together is the monthly board meeting. Board meetings are about accountability. Investors say ‘Tell us what you are going to do, and then exceed that’. The problem is that pre-PMF founders making promises around timing is ludicrous. The best a founder can do is to identify a key metric and experiment around it. This process is completely unpredictable, because almost all experiments fail (about 80%). So the best a founder can do is tell the board they are working on it and they may have results in a few months or never.
This kind of statement feels very very bad to venture partners who are used to PMF companies, because once a market is established, the founder has control of many more variables for success and the company turns into an execution play. The above statement from a founder sounds like they have low expectations for their company or are trying to shirk accountability. So inevitably the board pressures the founder into promising something. And then you spin the roulette wheel. If the founder does move that metric in the promised time, another promise needs to get made and the roulette wheel is spun again. As you can imagine, new founders in this situation are going to fail repeatedly, demoralizing them and their team.
This is what leads to the death blow. Since venture investors deploy capital and new founders don’t understand how hard management is, both sides will decide that adding headcount will help. You go get a great SEO person to work on that, or buy a great PM from Airbnb. You need more engineers so you can work harder and get more done. However as Fred Brooks famously wrote about engineering teams 50 years ago, the same is true for startups. Applying capital to early stage startups doesn’t work because finding PMF is an exercise for the founders. They have to hold the market in their head and develop enough of a map of their customer needs and emotions to experiment and continuously reposition what they do. This takes a ton of time. If you hire people, then you have to spend your time managing.
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