The Myth of Product-Market Fit: Why Venture Capitalists Bet on the Founder-Investor Fit?

The so-called 'product-market fit' often just refers to a 'founder-investor fit' that is attached to some revenue figures.

Written by: rosie

Compiled by: Luffy, Foresight News

Venture capital firms (VC) operate based on a simple premise: to find companies with product-market fit, provide them with funding to scale, and then gain 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 the time to delve into user behavior and retention metrics.

So, they adopted an alternative standard: 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 regard 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 founders.

The so-called "product-market fit" often merely attaches some revenue figures to the "founder-investor fit."

Selective Bias Issue

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 that they will work closely with the founders to navigate multiple critical moments, market changes, and strategic decisions together. A great founder can find a way even with an average product, while a mediocre founder can still mess things up even with an excellent product.

But this will cause systemic bias: favoring founders who are good at communicating with investors rather than those who are good at communicating with customers.

The result is that the company can raise funds, but it struggles to retain users. The product seems reasonable in the presentation, but fails in actual use. The so-called "product-market fit" only exists in the conference room.

What caused the "transformation epidemic"

If you have ever wondered why so many well-funded startups go through multiple pivots, then the "founder-investor fit" can perfectly explain it.

Data shows that nearly 67% of startups get stuck at some stage in the venture capital process, with less than half able to raise a new round of financing. Interestingly, those companies that do manage to secure follow-up financing often adjust their direction multiple times during the fundraising process.

When a company raises a large amount of money based on the qualities of its founders rather than the actual appeal of its products, its pressure shifts to maintaining investor confidence rather than serving customers.

Transformation allows founders to continue telling a growth story without having to admit that the original product is unworkable. Investors are betting on the founders rather than a specific product, so they often support transformations that sound strategically meaningful.

This has led the company to focus on financing rather than customer satisfaction. They are very good at identifying new markets, building engaging narratives, and maintaining investor enthusiasm. However, they are not good at creating things that people truly want to use continuously.

Indicator Performance

Most early companies do not have a true product-market fit metric. Instead, they have metrics to indicate product-market fit to investors.

Replace daily active users with monthly active users, replace user group retention rate with total revenue, replace organic user growth with partnership announcements, and replace spontaneous user behavior with testimonials from friendly customers.

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 use your product without prompts, they feel frustrated when the product malfunctions, they actively recommend your product, and they are willing to pay more over time.

Investor-friendly indicators appear in the presentation: exponential growth charts, impressive brand collaborations, market size calculations, and competitive positioning analysis.

When founders focus on optimizing the second type of metric (because it allows them to secure funding), a disconnect occurs; while the first type of metric truly determines whether the business is viable.

Why Investors Can't See the Difference

Most VCs will engage in pattern matching based on successful companies they have seen in the past, rather than assessing whether the current market conditions align with these historical patterns.

They are looking for founders who can remind them of past winners, indicators similar to those of previous winners, and stories that sound like those of previous winners.

This approach is effective when the market is stable and customer behavior is predictable. However, when technology, user expectations, or competitive dynamics change, this approach becomes ineffective.

Investors who funded software as a service companies in 2010 knew what successful SaaS metrics looked like at that 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.

Therefore, they invest in founders who can tell compelling stories and explain why their metrics will resemble those of SaaS metrics from 2010, rather than in founders who understand the current market reality.

No matter how much funding you have, you cannot achieve product-market fit through money.

Cascade Effect of Social Identity

Once a company secures funding from a respected VC, other investors assume that they have conducted due diligence on product-market fit.

This has led to cascading validation, where the quality of investors replaces the quality of products. "We have the support of a top-tier venture capital firm" has become the primary 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 endorsed it.

This social recognition can temporarily replace true product-market fit, creating companies that appear to be very successful on the surface but are actually struggling with fundamental product issues.

Why This Matters to Founders

Understanding financing is mainly about the alignment between founders and investors, rather than the fit between the product and the market, which will change the way you build your company.

If you are merely trying to attract investors, then you will build something that can secure funding but is not necessarily sustainable. If you are trying to attract customers, then you may build something sustainable, but it will be difficult to obtain 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 usually 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 alignment will lead to predictable market inefficiencies:

If an excellent product does not have smooth financing channels, it will receive funding that does not match its potential, allowing competitors with financial support to capture the market through capital rather than product quality.

Investors in mediocre products receive funding that is excessive relative to their fundamentals, leading to unsustainable valuations and inevitable disappointments. Research shows that 50% of venture-backed startups fail within 5 years, and only 1% of companies can become unicorns.

The true product-market fit becomes increasingly difficult to identify as signals are drowned out by financing performances and social validation cascades.

Innovation is centered around investor preferences rather than customer needs, resulting in market saturation and opportunities not being fully developed.

What does this mean for the ecosystem

Recognizing that this pattern does not mean that the qualities of the founders are 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 compatibility between founders and investors, 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 alignment between founders and investors.

They have a deep understanding of their clients, which allows them to create products that are not influenced by investor opinions. Then, they translate this understanding into a framework that investors can evaluate and support.

The worst outcome is that the founders mistakenly take the investors' enthusiasm as validation from customers, or the investors mistakenly interpret 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 an amazing product-market fit, ask whether they mean that customers can’t live without the product or that investors can’t stop praising the founder. This distinction determines whether you are looking at a sustainable business or a clever financing performance.