Written by: rosie
Compiled by: Luffy, Foresight News
Venture capital firms (VCs) operate on a simple premise: find companies with product-market fit, fund them to scale, and then reap returns as the company grows.
The problem is that most VCs are actually unable to assess product-market fit. They are not the target customers, they do not understand the use cases, and they rarely have time to delve into user behavior and retention metrics.
Thus, they adopt an alternative criterion: Do I like this company founder? Do they remind me of other successful founders? Can I imagine working with them for the next seven years?
Research shows that 95% of surveyed VCs view the founder or founding team as the most important factor in their investment decisions. Not market size, not product appeal, and not competitive advantage, but the founder.
The so-called 'product-market fit' is often just 'founder-investor alignment' attached to some revenue figures.
Selection bias issues
The reality of most venture capital meetings is:
Investors spend 80% of their time evaluating founders—their backgrounds, communication styles, strategic thinking, and cultural fit with the company. Only 20% of the time is spent focusing on the actual product and market dynamics.
From a risk management perspective, this makes sense. Investors know they will work closely with the founders to navigate multiple critical moments, market changes, and strategic decisions. An excellent founder can find a way out even with an average product, while a mediocre founder may mess things up even with an outstanding product.
But this creates a systemic bias: favoring founders who excel at communicating with investors rather than those who excel at communicating with customers.
The result is that the company can raise funds but has difficulty retaining users. The product seems reasonable in the presentation but fails in actual use. The so-called 'product-market fit' exists only in the conference room.
What causes the 'pivoting epidemic'?
If you've ever wondered why so many well-funded startups keep pivoting, then 'founder-investor alignment' perfectly explains this.
Data shows that nearly 67% of startups get stuck at some point during the venture capital process, with less than half able to raise a new round of funding. But interestingly, those that do raise follow-on funding often adjust their direction multiple times during the fundraising process.
When a company raises substantial funds based on founder quality rather than true product appeal, the pressure shifts to maintaining investor confidence rather than serving customers.
Pivoting allows founders to continue telling growth stories without admitting the original product is unworkable. Investors bet on the founders rather than a specific product, thus they often support pivots that sound strategically meaningful.
This leads companies to focus on fundraising instead of customer satisfaction. They are very good at identifying new markets, crafting compelling narratives, and maintaining investor enthusiasm. But they are not good at creating things that people truly want to use continuously.
Metric performance
Most early companies do not have true product-market fit metrics. Instead, they have metrics that signal product-market fit to investors.
Replace daily active users with monthly active users, total revenue with user group retention rate, partnership announcements with organic user growth, and friendly customer testimonials with spontaneous user behavior.
These may not necessarily be false metrics, but they serve the investor narrative rather than business sustainability.
True product-market fit is reflected in user behavior: people use your product without prompting, feel frustrated when the product malfunctions, actively recommend your product, and are willing to pay more over time.
Investor-friendly metrics appear in the presentation: exponential growth charts, impressive brand partnerships, market size estimates, competitive positioning analysis.
When founders focus on optimizing the second set of metrics (because it helps them raise funds), disconnect arises; while the first set of metrics determines whether the business is genuinely viable.
Why investors fail to see the differences
Most VCs match patterns based on successful companies they've seen in the past, rather than evaluating whether current market conditions fit those historical patterns.
They are looking for founders who remind them of former winners, metrics similar to previous winners, and stories that sound like those of previous winners.
This approach works when the market is stable and customer behavior is predictable. But when technology, user expectations, or competitive dynamics change, this approach fails.
Investors who funded software-as-a-service companies in 2010 knew what successful SaaS metrics looked like at that time. But they may not know what a sustainable SaaS business will look like in 2025, where customer acquisition costs will be ten times higher, and switching costs will decrease.
Thus, they invest in those founders who can tell compelling stories and explain why their metrics will look like the 2010 SaaS metrics, rather than those who understand the current market realities.
No matter how much funding you have, you cannot achieve product-market fit through money.
Cascading effects of social proof
Once a company secures funding from a reputable VC, other investors assume they have conducted due diligence on product-market fit.
This creates cascading validation, where the quality of investors replaces the quality of the product. 'We have the backing of a top-tier venture capital firm' becomes the main signal of product-market fit, regardless of actual user engagement.
Customers, employees, and partners begin to believe in the product, not because they have used it and liked it, but because smart investors have recognized it.
This social proof can temporarily replace true product-market fit, creating companies that appear successful on the surface but actually struggle with fundamental product issues.
Why this is important for founders
Understanding that fundraising is primarily about founder-investor alignment rather than product-market fit will change the way you build a company.
If you only build to attract investors, then you will create something that can get funded but may not necessarily be sustainable. If you build to attract customers, then you may create something sustainable but struggle to raise the funds needed for scaling.
The most successful founders know how to create true product-market fit while maintaining the ability to communicate this fit to investors in a way they can understand and get excited about.
This often means translating customer insights into investor language: showing how user behavior translates into revenue metrics, how product decisions create competitive advantages, and how market understanding drives strategic positioning.
Systemic consequences
Replacing product-market fit with founder-investor alignment leads to predictable market inefficiencies:
Excellent products that struggle to secure funding will receive less capital than their potential warrants, allowing well-funded competitors to capture the market through capital rather than product quality.
Excellent fundraisers with mediocre products receive more funding than their fundamentals warrant, leading to unsustainable valuations and inevitable disappointments. Research shows that 50% of venture-backed startups fail within five years, and only 1% can become unicorns.
True product-market fit becomes harder to identify because signals are drowned out by funding performances and social proof cascading effects.
Innovation gathers around investor preferences rather than customer needs, leading to market saturation and under-explored opportunities.
What does this mean for the ecosystem?
Recognizing that this model does not mean that the quality of the founder is irrelevant, nor does it mean that all venture capital decisions are arbitrary. Great founders do indeed create better companies over time.
But this does mean that the commonly used 'product-market fit' in venture capital is often a lagging indicator of founder-investor compatibility rather than a leading indicator of business success.
Companies with the most sustainable advantages are often those that achieve true product-market fit before optimizing founder-investor alignment.
They have a deep enough understanding of their customers to create products that are not influenced by investor opinions. They then translate this understanding into a framework that investors can evaluate and support.
The worst outcome is when founders mistakenly take investor enthusiasm as customer validation, or investors misinterpret their trust in the founders as evidence of market opportunity.
Both are important, but confusing them can make it difficult for well-funded companies to create lasting value.
Next time you hear a company has amazing product-market fit, ask whether they mean customers can't live without the product, or whether investors are singing the founder's praises. This distinction determines whether you're looking at a sustainable business or a clever funding performance.