Venture capital firms (VCs) operate on a simple premise: find companies with product-market fit, provide funding to scale them, 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 application, and they rarely have time to delve into user behavior and retention metrics.
Thus, they adopt an alternative standard: Do I like this company's 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' often carries some revenue figures attached to it as 'founder-investor fit.'
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 their 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. A great founder can find a way even if the product is average, while a mediocre founder can mess up even with an outstanding product.
Image source: rosie
But this creates a systematic bias: favoring founders who are good at communicating with investors rather than those who are good at communicating with customers.
The result is that companies can raise funds but struggle to retain users. The product may appear reasonable in presentations but fails in actual use. The so-called 'product-market fit' exists only in the boardroom.
Image source: rosie
What led to the 'transformation epidemic'?
If you've ever wondered why so many well-funded startups pivot repeatedly, then 'founder-investor fit' perfectly explains this.
Data shows that nearly 67% of startups stagnate at some stage of the venture capital process, with less than half able to raise a new round of funding. Interestingly, those that do secure follow-on funding often pivot several times during the fundraising process.
When a company raises significant funding based on the quality of its founders rather than the true appeal of the product, its pressure shifts to maintaining investor confidence rather than serving customers.
Pivoting allows founders to continue telling growth stories without having to admit that the original product doesn't work. Investors bet on founders rather than on specific products, so they often support pivots that sound strategically meaningful.
This leads companies to focus on fundraising rather than customer satisfaction. They excel at discovering new markets, crafting compelling narratives, and maintaining investor enthusiasm. However, they are not good at creating things that people genuinely want to use continuously.
Metrics performance
Most early-stage companies do not have true product-market fit metrics. Instead, they have metrics that signal product-market fit to investors.
Using monthly active users instead of daily active users, total revenue instead of user group retention rates, partnership announcements instead of organic user growth, and friendly customer testimonials instead of spontaneous user behavior.
These may not necessarily be false indicators, but they serve the narrative of investors rather than business sustainability.
True product-market fit is reflected in user behavior: people will use your product without prompting, feel frustrated when the product fails, actively recommend your product, and be willing to pay more over time.
Investor-friendly metrics appear in presentations: exponential growth charts, impressive brand partnerships, market size estimates, competitive positioning analyses.
A disconnect occurs when founders focus on optimizing the second type of metrics (because it helps them secure funding), while the first type of metrics determines whether the business is truly viable.
Why investors fail to see the difference
Most VCs match patterns based on successful companies they have seen in the past, rather than assessing whether the current market conditions align with those historical patterns.
They are looking for founders who remind them of past winners, metrics similar to those of previous winners, and stories that sound like those of past 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 can fail.
Investors who funded software-as-a-service companies in 2010 knew what successful SaaS metrics looked like at the time. But they may not necessarily know what a sustainable SaaS business will look like in 2025, where customer acquisition costs will be 10 times higher, while conversion costs will decrease.
As a result, they invest in founders who can tell compelling stories about why their metrics will resemble 2010 SaaS metrics, rather than those who understand the current market realities.
Image source: rosie Regardless of how much funding you receive, you cannot achieve product-market fit through money.
The cascade effect of social validation
Once a company receives funding from a respected VC, other investors assume that a due diligence on product-market fit has been conducted.
This creates a cascade of validation where the quality of investors replaces the quality of the product. 'We have the support of a premier venture capital firm' becomes the primary signal of product-market fit, regardless of actual user engagement.
Customers, employees, and partners start believing in the product, not because they have used it and like it, but because smart investors endorsed it.
This social validation can temporarily substitute for true product-market fit, creating companies that appear successful on the surface but struggle fundamentally with product issues.
Why this is important for founders
Understanding that fundraising is primarily about founder-investor fit rather than product-market fit changes the way you build a company.
If you are only trying to attract investors, then you will build something that can get funding but may not be sustainable. If you are trying to attract customers, you may build something sustainable but struggle to secure the funding needed for scaling.
The most successful founders know how to create true product-market fit while maintaining the ability to communicate that fit to investors in a way that they can understand and get excited about.
This often means translating customer insights into investor language: demonstrating 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 fit leads to predictable market inefficiencies:
Excellent products may receive funding that does not match their potential if the financing channels are blocked, allowing well-funded competitors to capture the market through capital rather than product quality.
Excellent fundraisers with mediocre products receive funding that is disproportionate to their fundamentals, leading to unsustainable valuations and inevitable disappointment. Research shows that 50% of venture-backed startups fail within 5 years, and only 1% can become unicorns.
Image source: rosie
True product-market fit becomes harder to identify as signals are drowned out by the performance of funding and the social validation cascade.
Innovation clusters around investor preferences rather than customer needs, leading to market saturation and underdeveloped opportunities.
What this means for the ecosystem
Recognizing this pattern does not mean that the quality of the founders is unimportant, 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 'product-market fit' commonly used 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 the fit between founders and investors.
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 that founders mistakenly take investor enthusiasm as customer endorsement, or investors mistakenly take their trust in founders as evidence of market opportunity.
Both are important, but confusing them makes it difficult for well-funded companies to create lasting value.
The next time you hear that a company has amazing product-market fit, ask whether they mean customers can't live without the product or investors are singing the founders' praises. This distinction determines whether what you see is a sustainable business or a clever fundraising performance.
This article is republished with permission from: (Foresight News)
Original title: (why product-market fit is usually founder-investor fit)
Original author: rosie
Translated by: Luffy, Foresight News
'95% only look at who the founder is! Why can't many crypto VCs assess product-market fit?' This article was originally published in 'Crypto City'