I love reading Marc Andreessen’s blog – nearly every time he gets me thinking about myself and what I’m doing as a VC in a way that (hopefully) makes me smarter.

This post is the fourth in his guide to startups series, and in it he asks the question:

What is the most important ingredient for a startup?

There are only three contenders – team, product and market – and Marc plumps heavily for market. This formulation from Andy Rachleff captures it well:

• When a great team meets a lousy market, market wins.
• When a lousy team meets a great market, market wins.
• When a great team meets a great market, something special happens.

And if you substitute product for team it still works.

So a great market wins every time – I couldn’t agree more.  In theory a startup can change it’s team, it’s product or it’s market, but for me the market is by far the most difficult to play with. This debate alone is probably worth a whole book and if you want to get into it more check out Mark’s post, but if I’m going to invest believing in the market is all important.

Marc goes on to talk about the importance of getting to product/market fit – and this is the point I really want to draw out. Unfortunately very few companies get the market and the product spot on with their first attempt – there are far too many unknowns for it to be any other way – which then means that success is all about doing everything you need to do to get that fit right.

Most consumer internet startups are born from a conviction that there is demand for a new service – e.g. travel focused social networking for WAYN (in which we have an investment). Getting the product/market fit right means adjusting the product and shifting the way you think about the market until the two really chime. The WAYN guys have been doing that recently and the early indications are promising.  Take a look at the Alexa graph.  (I couldn’t get the code right for the picture to appear in the post – sorry.)
I had a guy in here last week with a consumer internet startup, seed stage, who I really liked precisely because I got an overwhelming sense that he would be awesome in doing everything it took to iterate his way to success – and this is a really tough thing to do. Gathering feedback is hard (not many people want to talk to you at all and nobody wants to tell you your baby is ugly), working out which bits of that feedback are good (and not good) is tough, as is figuring out which of your initial beliefs/prejudices to jettison, as is constantly getting knocked back by customers/investors, not to mention the stress of living with the possibility that you might not be onto a winner.

This chap has a really good concept and plan (he is still in stealth mode so I can’t say what it is) but  about the only thing I can say for sure is that he will have to change it – that said I have confidence that so long as the market call is right he will find a way to succeed.

So in this case I really believe in the market and think this is the guy to after it – which might mean I make an investment.  If it was the other way round – I really like the guy, and I think the market might be interesting – then it wouldn’t be a runner.

Marc makes a similar point:

In my experience, the most frequent case of great team paired with bad product and/or terrible market is the second- or third-time entrepreneur whose first company was a huge success. People get cocky, and slip up. There is one high-profile, highly successful software entrepreneur right now who is burning through something like $80 million in venture funding in his latest startup and has practically nothing to show for it except for some great press clippings and a couple of beta customers — because there is virtually no market for what he is building.

As a VC it is easy to make the mistake of backing rock star entrepreneurs when you have doubts about the market they are going after.  Believe me.  After all – who is to say your assessment is any better than theirs?

To bring this to a conclusion, I guess what I’m saying is that you can’t spend too much time making sure you have a market to go after (and if you want to build a big company it had better be a big market) and then understanding exactly how your product will take share/dominate it.  Doing this well is not about finding an analyst report that says XYZ will be huge in 2012 – it is about bottoms up analysis of what people will do with your stuff.