Startup Frameworks: Product vs. Distribution

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In 2018, Justin Kan posted this tweet about product vs. distribution. At the time, Justin was building Atrium, a legal software and law firm startup. The tweet drew a lot of attention because it went against conventional wisdom from Y Combinator (YC), the accelerator program that Justin participated in, that technology startups should be obsessed with creating the product. In YC’s essential startup advice, they say, “Growth is the result of a great product not the precursor.”

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Atrium failed after raising $75 million from General Catalyst, YC, and Andreessen Horowitz. So why did they fail? 

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In the initial $10.5 million round, Justin intentionally made it one of the biggest party rounds ever, taking small checks from ~100 institutional and angel investors because he wanted these investors to become customers and evangelize the product for when they would draft term sheets, LP agreements, and other documents related to startup investing in the future. They built a fundraising concierge, which connected 1,000 startup founders to $200 million in capital in 2019. They even created Atrium Academy, a startup boot camp to pair first-time founders with seasoned entrepreneurs and venture capitalists to learn how to raise a Series A round. 130 startups applied to the boot camp, and VCs from Accel, General Catalyst, and Initialized Capital participated. So, it wasn’t because Atrium failed to get distribution – they built excellent distribution channels.

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Instead, focusing on building excellent distribution distracted the team from building a truly great product. In his post-mortem video, Justin acknowledged losing sight of what makes technology companies great. The best software startups in the world, like Apple, Google, and Facebook, made beautifully crafted new products. Atrium failed to accomplish that.

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I think if you asked anyone knowledgeable about building startups, they would agree that product and distribution are not binary. The best founders are most likely thinking about both. However, the sequencing of how to build a startup is still up for debate.

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Eric Bahn, a Partner at Hustle Fund, authored a blog post titled “Don’t be obsessed with your product,” where he makes a case for distribution over product and shares his personal story of building a SaaS company using this approach. He secured $80K from six clients upfront, then delivered the product 6 months later.

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So, can you focus on distribution first, or as YC and Justin advise, does a great product have to be the precursor of growth? Since I left my job to build a company earlier this year, I’ve been thinking a lot about this. For my own use and other startup founders, I wanted to create a framework for when to focus on product vs. distribution based on a set of factors. To develop this framework, I researched several startups to see what they focused on first and looked for patterns. I wanted to understand why leading with distribution or product worked for them.

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Startups that focused on distribution first

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Glossier

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Emily Weiss started Glossier, the popular beauty brand, by building distribution before launching products. In 2010, Emily started a blog called Into The Gloss while working as a fashion assistant at Vogue. As Into The Gloss grew in popularity, Emily realized she could use this as her primary distribution channel to launch her makeup and skincare products. She then raised $1 million to launch the business with 4 products. Fast forward to today, Glossier has raised over $250 million in funding and was last valued at $1.8 billion.

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Why did focusing on distribution first work for Glossier?

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• Into The Gloss allowed Emily to build credibility and provide value to consumers before she ever tied to sell them something. The blog also allowed her to see what consumers wanted and the opportunities in the market. Should would then use these insights during the first batch of product development.

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• Beauty products require significant upfront capital for a chemist, lab space, the initial inventory, and more.

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• Establishing a distribution channel would lower the barrier for a potential investor to say yes since it would be cheaper for her to get the products in front of an audience. She wouldn’t have to spend money on traditional ads, PR, etc., or time setting up robust wholesale or tradeshow deals.

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• The products in the makeup and skincare industry are largely undifferentiated. You’ll notice that most use the same chemical compounds and formulas if you look at the ingredients.

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Thumbtack

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Marco Zappacosta, Sander Daniels, Jonathan Swanson, and Jeremy Tunnell, the founders of Thumbtack, the American home services website, started the company with a distribution bet, not a product one. Thumbtack’s product was largely undifferentiated compared to the incumbents at the time, Angie’s List and Yelp. They saw an untapped opportunity that their competitors weren’t focusing on at the time in SEO to build a defensible distribution channel to acquire customers without hiring expensive sales teams or spending money on ads. The team spent 18 months working on the three pillars of SEO – site architecture, relevant content, and acquiring links. The strategy resulted in 130,000 merchant sign-ups, thousands of links from reputable sites that spilled over and elevated their brand, and the start of a strong moat that would protect them from product-first innovation in the home services market in the future. 

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Why did focusing on distribution first work for Thumbtack?

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• Thumbtack saw their competitors like Angie’s List and Yelp had a gap in their distribution strategy which they could exploit. They believed these incumbents neglected SEO because they had solid revenue models and instead relied on traditional marketing channels like sales and paid advertising.

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• Thumbtack is a tech-enabled company, not a tech-first company. It’s a home services website, not a fundamentally new technology or experience. 

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• Thumbtack’s founders were young, scrappy, and didn’t have product backgrounds. They had a much better chance of competing on distribution than on product because the incumbents had already recruited top product leaders.

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Nerdwallet

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Tim Chen, Founder & CEO of NerdWallet, only found success after focusing on distribution. His initial product was a spreadsheet to help his sister evaluate credit card options with lower foreign transaction fees. The spreadsheet was shared widely, even outside his family and friend group, so he used $800 to set up a website. The content product itself was not good enough to make NerdWallet a good business. The website earned $75 in the first year and ~$60,000 in the second. As a former Wall Street hedge fund analyst, Tim was losing money based on the opportunity cost of what he could have earned if he was still on salary. He almost gave up and returned to work until NerdWallet doubled down on distribution through SEO. His content began to rank at the top of Google search results for competitive keywords like “best credit cards,” and his revenue spiked.

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Why did focusing on distribution first work for NerdWallet?

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• NerdWallet’s product is content, not technology.

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• NerdWallet’s business model relies on advertisers and affiliate partners to pay them commissions for recommending their products. The more eyeballs they get on their content, the more valuable it is to advertisers and affiliate partners.

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• Tim Chen comes from a finance background, not a traditional product background.

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Startups that focused on product first

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Facebook

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On February 4th, 2004, Mark Zuckerberg launched Facebook, called thefacebook at the time, from his dorm room at Harvard. Mark spent almost all his time on product and very little on distribution. The first invites went out to a few campus email lists, and the product was so good that it was an overnight success. Within the first day, thefacebook reported 650 registered users, and within two weeks, they had 4,300. What started on one college campus then spread like wildfire to Yale, Columbia, and Stanford, and eventually to the product it is today.

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Why did focusing on product first work for Facebook?

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• Mark was an engineer and had experience building other products & social apps like facemash – a website that asked Harvard students to choose the more attractive photo between two identification photos.

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• Facebook was a new technology. The user experience was so profound that the product got organic distribution through word of mouth, virality, and press.

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OpenAI

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OpenAI, the creators of ChatGPT, also bet entirely on building the product before spending time on distribution. Founded in 2015, OpenAI released the first model, GPT-1 in June 2018, GPT-2 in Feb 2019, GPT-3 in June 2020, and GPT-3.5 in Nov 2022. OpenAI introduced ChatGPT using GPT-3.5 as the first research preview that consumers could use, and it broke the Internet. By Jan 2023, OpenAI had reached 100 million monthly active users, making it the fastest-growing consumer application in history. No ads, no sales, no marketing.

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Why did focusing on product first work for OpenAI

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• Sam Altman and the other founders of OpenAI have deep experience building products. Sam previously started a startup called Loopt, a location-based social networking application, then was President at Y Combinator, the top startup accelerator in the world, where he worked with thousands of founders individually on how to build product.

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• OpenAI was a new technology. This was the first time the general public got to feel how powerful artificial intelligence was. As the first to market, they had an advantage over similar products launched afterward, like Bard from Google and Claude from Anthropic.

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A framework for product vs. distribution

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Primary things to consider

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Revenue model

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• Focus on product: If you have a great revenue model, typically a highly optimized pay-per-transaction or commission based, since you’ll be competitive in traditional marketing channels like sales and paid ads.

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• Focus on distribution: If you have a weak revenue model, typically that means free, or you don’t know how to make money yet, because you won’t be competitive in traditional marketing channels. You’ll need to be scrappy and spend time building out untraditional distribution channels like SEO and content marketing.

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Product 

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• Focus on product: If you are a tech-first company, building fundamentally new technology and experience for users like Uber, Airbnb, or Facebook.

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• Focus on distribution: If you are tech-enabled or not a tech company, like Triplebyte (a hiring marketplace), Thumbtack (home services website), or NerdWallet (personal finance advice).

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Skillset 

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• Focus on product: If your team has built successful products.

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• Focus on distribution: If your team has no experience building products.

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Industry and how users find out about your product

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• Focus on product: If users find out about products in your industry traditionally through word of mouth or virality like social apps (Twitter, Snapchat, TikTok) and games (Zynga, Nintendo, Electronic Arts), or a outbound sales like B2B software companies (Brex, Watershed, Wiz).

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• Focus on distribution: If users find out about products in your industry traditionally through paid advertisement, Google search, or in retail stores like DTC startups (Casper, Warby Parker, Allbirds), CPG startups (Liquid Death, Olipop, Prime Hydration), and startups that sell undifferentiated products (Thumbtack, Amazon, Yelp, Mint).

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Secondary things to consider

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Runway

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• Focus on product: If you have a small amount of runway and need to drive revenue to continue working on a startup. It’s faster to build a product and sell directly through a landing page than build a scrappy distribution channel and sell indirectly.

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• Focus on distribution: If you have a more extended runway and can bet that a distribution channel will pay off down the road for your startup.

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Conviction in what you’re building

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• Focus on product: If you have a good sense of the problem that your customer is facing and know how much they will pay for it.

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• Focus on distribution: If you’re building for a customer that you can empathize with but don’t fully understand their most painful problems yet or how much they will pay for it.

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The best founders are thinking about how to build a differentiated product that users love and an unfair distribution advantage that improves their unit economics and ability to scale. While I hope my framework helps you decide whether to focus on product vs. distribution, there is no “correct” way. That’s the beauty of building a startup; you make your own rules.