Marc Andreessen: When VCs Say “No”... & Customer Problems Stack Rank Framework. | VC Jobs
Y-Combinator Signs of Fake Product Market Fit & Customer Problems Stack Rank Framework.
👋Hey Sahil here! Welcome to this bi-weekly venture curator newsletter. Each week, I tackle questions about building products, startups, growth, and venture capital! In today’s newsletter, we dive into -
Deep Dive: Marc Andreessen: When VCs Say “No”...
Quick Dive:
Y-Combinator: These are signs of Fake Product Market Fit.
Customer Problems Stack Rank Framework.
Why Are Consumer Product Metrics Often Disappointing, and How Should Founders Interpret Them?
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TODAY’S DEEP DIVE
Marc Andreessen: When The VCs Say “No”..
Many founders come across news like 'Startup founder secures funding after pitching to 100 VCs' A few examples could be Canvas - “How 100 VC Rejections Led To A $26 Billion Startup For This 35-Year-Old”. You will see tons of articles surfing the internet..
Looking at this news, founders often feel motivated to pitch to as many investors as possible.
I agree that one "no" doesn’t mean anything—the VC could just be having a bad day.
But If you meet with five or six or eight VCs and they all say no, it’s not a coincidence. There is something wrong with your plan.
In fact, many founders are inspired by stories of startup founders securing funding after pitching to numerous VCs, but they often overlook the fact that these successful founders continuously refined their plans with each pitch.
Meeting with more VCs after a bunch have said no is probably a waste of time. Instead, retool your plan—which is what this post is about.
Remember VCs rarely actually say “no”—more often they say “maybe”, “not right now”, “my partners aren’t sure”, or “that’s interesting, let me think about it”.
They do that because they don’t want to invest in your company given the current facts, but they want to keep the door open. And that’s exactly what you want—you want to be able to go back to them with a new set of facts, change their minds, and get to “yes”.
The second thing to consider is the funding environment which influences more in fundraising. (But not in the founder's control...) so focus on retooling your plans...
I know this is hard — changing the facts of your plan and what you are trying to do, to make your company more fundable. But do it..
So how do you retool your plans? - Consider the onion theory of risk.
Image Source: Mintzedge
Investors, look at the risk around an investment as if “it’s an onion.”
- Marc Andreessen
Just like you peel an onion and remove each layer in turn, risk in a startup investment comes in layers that get peeled away—reduced—one by one.
Your challenge as an entrepreneur trying to raise venture capital is to keep peeling layers of risk off of your particular onion until the VCs say “yes”—until the risk in your startup is reduced to the point where investing in your startup doesn’t look terrifying and merely looks risky.
What are the layers of risk? 🧅
Founder Risk: Evaluate team dynamics; consider adding or replacing founders if needed.
Market Risk: Validate the market practically; seek paying customers or credible prospects.
Competition Risk: Ensure strong differentiation; avoid claiming no competition.
Financing Risk: Rethink and reduce future funding needs; optimize your financial plan.
Technology and Product Risks: Build and demonstrate your product; focus on progress.
Hiring Risk: Add crucial positions to the founding team if concerns arise.
Remember, the key is to make progress, build products, and continuously peel away risks to optimize chances of securing funds. Adapt, refine, and repeat until you hear that coveted "yes"!
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QUICK DIVES
1. Y-Combinator: These are signs of Fake Product Market Fit.
Nowadays - It's pretty common for companies to claim they've nailed product-market fit when, in reality, they're quite far from it. I'd argue this is a major cause of downfall, especially for post-seed companies.
Many founders often face a dilemma where they believe that they have achieved product-market fit based on some factor, but honestly, it’s just a "Fake Product-Market Fit." What are those factors?
Firstly, some founders believe they've hit the jackpot when they secure funding from impressive individuals or renowned funds. The thought is that if these influential people or funds chose their company, it must mean they have product-market fit. This belief is surprisingly widespread.
Secondly, there's a trend where companies manage to raise substantial amounts, even before having a product that people truly love. Interestingly, instead of focusing on users and improving the product, founders often shift their focus to building the company, which is usually not the best move.
Thirdly, there's this phenomenon we call "magical thinking". It involves ignoring obvious facts or not bothering to measure crucial metrics that would reveal whether product-market fit exists. For instance, not understanding churn or the payback period after acquiring a customer. If you're not aware of these numbers, it's easy to convince yourself that you've achieved product-market fit when you haven't.
Lastly, there's a tendency for people to delude themselves into thinking they've achieved product-market fit simply because they don't want to face the idea that they might need better engineering or product improvement. Admitting that improving the product is challenging, they find it easier to just believe their product is already good.
Most of the founders fell into this trap of ‘Fake Product Market Fit’. Not only this - one of the most common misconceptions is that
“Product-Market Fit Means Only You've To Build A Product That Your Users Want.
In reality - Product-market fit typically feels like your product is gaining traction with profitable usage.
”your product is attracting users, and word of mouth or advertising channels are working well. Users love your product, and they're sticking around.
However, there's a catch.Parts of your product that you didn't build to scale are starting to break. It could be software components or operational aspects, but something is faltering because it wasn't designed for this level of success.”
You might be thinking what’s this profitable usage about?
“It means these users are the ones you want, and economically, they make sense. You're not spending a lot for a user who only brings in a fraction of that cost. There's no crazy three-year payback period or anything like that.
So, for genuine product-market fit, we need both these components:
a product that's breaking in a good way due to increased usage
users who align with the economics you desire.
To achieve genuine product-market fit, founders need to determine if they have a real connection between their product and the market, instead of a fake one.
2. Customer Problems Stack Rank Framework
You know that saying “Everyone is fighting a battle you know nothing about?”
Turns out it’s true for your customers, too.
You might have visibility into how your customers are using your product or service, but you probably don’t have an understanding of every problem they’re trying to solve across their entire business.
This framework, dubbed CPSR by Shreyas Doshi, helps you get that additional visibility.
It’s extremely simple:
Ask your customers to rank the problems they’re actively trying to solve from most important to least important.
Where does the problem your product or service is helping them solve fall on this list?
The lower it falls on their list, the harder it will be for you to convince them to spend more and the faster they may be to churn if things aren’t working. If you’re selling B2B you can take it one step further by asking to get the same list from team members at the company who aren’t your primary contact.
Shreyas shared this as a product management framework, but it’s arguably even more applicable to founders.
3. Why Are Consumer Product Metrics Often Disappointing, and How Should Founders Interpret Them?
Recently Andrew Chen, Partner at a16z published an article on “Consumer Product Metrics” where he mentioned that -
“Consumer product metrics often seem terrible to entrepreneurs. Sign-up rates, retention rates, and user engagement are typically low across the board. For most products, over 90% of users refuse to sign up, and of those who do, over 90% become inactive over time.
Signup rates can be as low as 1%, especially for SEO-driven content pages. Homepage signup rates are better, sometimes reaching 10-20%. Over 95% of users are inactive on any given day, with retention curves showing steep drop-offs in the first weeks.
Getting 10% of total users to return daily is considered a success.
Social graph density is another challenge. Often, 50% or more of users don't connect with anyone else on the platform. Even Instagram, during its explosive growth, had 65% of users effectively following no one.
These metrics aren't an excuse for mediocrity but reflect the reality of consumer disinterest and impatience. The tech industry seeks unicorns with exceptional metrics, like WhatsApp's 70% DAU/MAU ratio. However, successful businesses can still be built on small percentages of engaged or paying users.
Entrepreneurs should understand these baseline metrics to plan better and have more options for their Plan B. The goal is to build great products that stand out from the average, despite the uphill battle in engaging and retaining users.
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THIS WEEK’S NEWS RECAP
Major News In VC, Startup Funding & Tech
Ex-Google researcher Aiden Gomez co-founded Cohere startup that develops customized AI models for enterprise tasks and has raised $500 Million. (More Here)
Cybersecurity startup Wiz, based in New York, has reportedly turned down a $23 billion acquisition offer from Alphabet. (More Here)
Elon Musk's xAI Powers Up 100K Nvidia GPUs to Train Grok. (More Here)
Andreessen Horowitz (a16z) led a $175M Series B funding round for Saronic, an Austin-based defence tech company, valuing it at $1 billion. (More Here)
Apple's research team has released open DCLM models on Hugging Face, featuring 7 billion and 1.4 billion parameters, outperforming Mistral and approaching the performance of Llama 3 and other leading models. (More Here)
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TWEET OF THIS WEEK
Best Tweet I Saw This Week
Notion passed 100 million users. The Notion co-founder shared a tweet about building Notion.
In that tweet, he also showed the Notion seed pitch deck they used in 2013. You can check it out. It might give you ideas for making a pitch deck and product demo video.
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That’s It For Today! Happy Tuesday. Will meet You on Thursday!
✍️Written By Sahil R | Venture Crew Team