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

Founders at the early stages of building their startups may have already created a strong solution, identified a gap in the market, or may 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 product-market fit? And what actually is product-market fit, anyway?

The investors at Sequoia, one of the world’s biggest venture capital firms, have come up with a very handy framework to answer those two questions. It distills the landscape into three archetypes.

“Hair on Fire” roughly means that your startup addresses an urgent problem. A security startup, for example, might fit here, especially if it can win initial business on the back of parachuting in to fix a breach or other problem already in progress. Or, think of the wave of companies that offered services to businesses and users when they were suddenly sheltering 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’s already out there. Square, which emerged as a new point of sale product in a seemingly old and saturated market, is a good example of this.

Lastly, “Future Vision” relates to deep tech, moonshots, and products out of left field. These would include quantum startups, but also those building flying cars or even autonomous vehicles that would ply our roads (or any of the tech that will be needed to make such vehicles).

Each of these archetypes will have its own customer mindset, competitive market status, opportunity/general product goals, challenges, examples of those who got it right and those that did not, and so on. Sequoia partner Jess Lee, a specialist in early-stage investing, gave a big talk on the concept at TechCrunch’s Early Stage event in Boston in April. Sequoia has written about the framework here, too.

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

Sequoia is confident enough of the structure that it uses the framework in its Arc program to help early-stage founders focus on how they are building. It also helps the firm evaluate potential startup investments. Beyond that, and just as importantly, founders can lean on an archetype to better anticipate and articulate the challenges and opportunities in their space. That can be helpful for decision-making internally, of course, as well as for fundraising or pitching partnerships or customers.

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

“I think you can create great companies in all those categories,” Lee said. Still, she admitted that certain kinds of companies might find it especially challenging to raise money in the current climate.

For deep tech and moonshots — two common kinds of startups found in the “Future Vision” category — fundraising “was easier in a zero-interest-rate period when there was a ton of capital flowing in,” Lee said. “I don’t know if [those companies] would have been able to raise as much [starting out now] as they had to, to be able to get to where they are now.”

Lee was a co-founder at Polyvore, which combined social mechanics and e-commerce — its users contributed fashion and product clips from around the web and used those products to assemble mood boards, with affiliate marketing underpinning it all. Polyvore was eventually acquired by Yahoo, and she parted ways with it. Yet, that e-commerce and consumer focus has stayed with her, she said, adding that she’s still interested in trying to find new winners in that category despite the challenges of trying to break into the space these days.

“It can still be done,” she said. “I feel like many consumer companies fall in the ‘Hard Fact’ category, and I particularly love working with consumer companies. But you have to be good at both marketing your problem as well as marketing your solution and building this. 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 was working on Snapchat, too. Like, I had my own version.’ And it sounded like it was similar, but just the right number of details 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 have to ruthlessly execute,” Lee said. “[You need] so much velocity to stay ahead of everyone.”

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