Thread by @jwdanner

The current funding market is terrible for founders.

Here's why it's damaging so many startups:

1/Normal market behavior is that seed companies are pre product market fit (PMF) and Series A companies have PMF.

2/These are not normal times.

Series A valuations have skyrocketed and are largely pre-PMF now, pushed by hedge funds and other late stage investors making bets on anything with traction.

3/ With the current market, Series A+ investors are using a couple of strategies to compete which work to their favor but are not great for founders.

One strategy is to move earlier and fund seed companies to give the venture fund optionality if the company achieves PMF.

4/The main problem with this is that venture investors know nothing about finding PMF unless the specific partners was a serial founder or has a lot of seed experience.

They also have no time to spend with their seed bets, so the founder gets no help achieving PMF.

5/There is a much bigger problem though.

Firms watch each other, and will sometimes pre-emptively fund a company's next round within a couple of months of the previous round. (momentum bets)

6/Now when you put together seed bets and momentum bets, crazy things happen.

I’ve seen series B’s now of pre-PMF companies where a seed bet and two momentum bets have happened.

These momentum bets are often made by junior partners trying to make a name.

7/One might think this is all good for founders because now you have $30m in the bank raised at a $200m valuation. What’s not to love?

For serial founders, it's no problem. But our industry is built on new founders and junior venture partners.

8/For serial founders who have seen this before, it’s no problem at all.

They stick to their founding team of 6–15, experimenting furiously until they find PMF and tell their investors to come back in a year.

9/But let's talk about new founders and junior venture partners.

The place this all comes together is the monthly board meeting.

Investors say ‘Tell us what you are going to do, and then exceed that’.

10/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.

11/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.

12/This kind of statement feels very very bad to venture partners who are used to PMF companies.

Once a market is established, the founder has control of many more variables for success and the company turns into an execution play.

13/The above statement from a founder sounds like they have low expectations for their company or are trying to shirk accountability.

So inevitably the young venture partner pressures the founder into promising something.

And then you spin the roulette wheel.

14/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 fail repeatedly, demoralizing them and their team.

15/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 decide that adding headcount will help.

The company gets a great SEO person to work on that, or buys a great PM from Airbnb.

16/The founder thinks they need more engineers so they 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.

en.wikipedia.org/wiki/The_Mythi…

17/ 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.

18/This takes a ton of time. If you hire people, then you have to spend your time managing.

A two pizza team is the right pre-PMF trade off between managing and experimenting.

19/Is there a good solution to this?

Probably not at a market level until hedge funds get out of the market.

I don’t expect Series A funders to stop making seed bets for optionality or avoid momentum investing.

20/So the only solution is for founders to play the game on their own terms.

That’s what serial founders do. They set expectations BEFORE THE ROUND IS RAISED about their process to find PMF and why it is a death blow to over-hire early.

21/I hope that this thread was useful to you in this momentum funding environment.

If you can stick to your guns, it can all work out and you will have plenty of cash in the bank to ride out the next downturn.

22/If you liked this thread, please follow me @jwdanner

23/Here is the backing blog piece for this thread if you would like to refer to it later.

johnwdanner.medium.com/product-market…

24/Here is the doc I use with founders on PMF for reference: