Five years ago I made the greatest change in my career to date, moving to full-time investing after 16 years in operating roles. Since then, I’ve made almost 100 investments, including many early-stage investments in a personal capacity as well as growth-stage investments in my role at L Catterton. I’m firmly convinced that operators and investors have a lot to teach one another: that operators who can draw on the “investor mindset” toolkit become better operators, and vice-versa. I want to share a few of these learnings. I’ll start with one today, and follow up with a few more later. Here’s the single most important thing I’ve learned as an investor that I didn’t pay enough attention to as an operator: category matters just as much as team and product. That is, a solid team in a great category will typically build a better business than a great team in a bad category. What’s a bad category? Some categories are just too hard, at least at a given moment in time. It could be (for example) because there’s no profit pool to go after, because incumbents have powerful moats, because distributors own the customer channel and extract rents, or because customers intrinsically don’t repeat (perhaps they have a one-time need). The problem with successful operators—and I’ve been very guilty of this myself—is that they think that everything can be fixed through great execution. They’ve learned the wrong lesson from their successes. I’ve seen this lesson play out over and over again in my personal, early-stage investing. Outstanding team meets impossible market. There’s a great quote from Buffett that captures the key insight: "When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." (1980 Shareholder Letter) And Marc Andreessen captured the spirit of this, adapting it for Silicon Valley: [...] in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail. The lesson for founders, and operators more generally? Not every market can be conquered by a great team with a great product. The choice of market matters a lot. This is most obviously true in the early days of a company, when a founder is deciding what problem to attack or whether to pivot the focus of the business. But it can be just as relevant for growth and even late-stage business, when deciding which expansion opportunities to prioritise: geography, customer segment, new products, or even an additional business model. Each of these represent a new market, that may have more or less favourable characteristics. I'll give two examples in the comments below. But I'd love to hear your examples of markets that were just too hard. What made them too hard?
So the lesson to founders and operators is: be sure to assess the market you’re planning to enter with the same diligence you’d apply to a key hire, a new product, or an M&A target.
I ran out of space in my post so am giving two examples here. We certainly learned this lesson at Amazon. Many of the projects we launched failed; probably the vast majority of them. (My old colleagues and friends Bill Carr and Colin Bryar discuss this in their outstanding book Working Backwards, the definitive account of the principles, process, and practices we lived by at Amazon.) There were many reasons a project might fail at Amazon. It could be the wrong product at the wrong time, poor execution, insufficient commitment of resources, etc. But sometimes, an outstanding team would execute perfectly and still come up short. I suspect that one of Amazon’s most famous failures, the Fire Phone, was an example of a bad market: one where all of the viable ecological niches, at least at that point in time, had already been filled by iPhone/iOS and Android.
Christopher North spot on wisdom, which is mainly experienced and hardly taught. A friend head hunter close to the French Tech ecosystem is sadly right saying that between 2010 and 2020, a few hundred founders, CPO driven, have become multi millionaires drawing on investors big money, but are a problem generation of leaders. only few were activating an actual business customer fit or balancing their product with the right sales momentum execution. Interested to have your board room experience feedback on today exchanges with these rich but in need to pivot operators!
I couldn't agree more. This rule works for non-entrepreneurs, too. You can stack the odds of career success in your favor by working in the right cities, sectors, and companies. Scott Galloway talks about this regularly -- If you are living in a medium to small city that is not growing, in an industry that isn't growing, and in a company that isn't growing, you will have to be in the 99th percentile of effort and performance to get the same results as someone working in a fast-growing sector (like tech) in New York, SF, Seattle, in tech.
Yet the reason why most companies ultimately fail, fail to react, or indeed fail to realise commensurate success with a world class product or uniquely differentiated service, or a loved brand is due to poor execution. The most important muscle to build inside any organisation - akin to a brain or a heart for us humans. Yet sadly it’s also the most under-developed and deprioritised muscle. But arguably at its best, like a brain or a heart, capable of delivering miracles. ❤️ 💪
Agree! One addition: Some seemingly bad categories or monopolies become victims of their own success, overplaying their moat by increasingly charging far beyond fair value. When challengers in parallel stopped trying due to historical bias, the hardest categories ironically become the easiest to disrupt 🥷
Christopher North I agree the cross over from operator to investor is no different than the cross over from investor to operator, the joy is experiencing both, remaining humble and taking the learnings. I certainly concur that you can be right on the product and team but timing is just wrong, being too early is one of the most frustrating lessons, the market is there (eventually). The second as you point out is that the best technology doesn't win (mostly) but great sales teams do, momentum matters more than technology (hard lesson for technical founders).
Two key learnings over the years, that (1) sales+marketing engines can successfully sell an inferior product and (2) it is virtually impossible to change entrenched human behaviour. A startup with limited resources trying to change buyer/consumer behaviour will struggle significantly on their journey.
Christopher North what are the tell tale signs that it's a poor market and not just poor execution? Genuinely interested as a founder I've always felt too close to the business to be properly objective on these kinds of debates. It's easy to blame the market when actually maybe it's me (and by extension my team) that isn't getting it done.
Technology investor, board member, advisor and mentor
3moSecond example: More recently, I made a personal investment into an outstanding team building a compliance and security solution — one I had experienced first-hand at several companies, and they had a differentiated approach. Sure enough, potential customers confirmed that their solution was technically superior. But that turned out not to be enough; they lost to inferior solutions the majority of time during the selection process. Why? In this market, distribution trumped product. Incumbent vendors were able to bundle inferior solutions at low cost to existing customers. “Cheap/free and good enough” beat “superior product” in this market.