Why the best startups look like bad ideas
Chris Dixon, an investor at Andreessen Horowitz, who previously
founded SiteAdvisor (a web security startup bought by McAfee) and
Hunch (a personal recommendations website acquired by eBay in
2011), took to GitHub yesterday to write about what
makes a good startup idea.
Good startup ideas, he said, initially sound like bad ideas.
Why?
“Good ideas that look like good ideas are already being worked on
by big companies. Entrepreneurs are in the business of the
leftovers,” he says, giving credit for the original phrasing to
PayPal and Palantir founder Peter Thiel. It’s the good ideas that
look like long shots that become innovative successes, Thiel first
explained.
To find a good idea, Dixon says, you need a secret, in the Thielian
sense- something that most other people don’t believe or are
willing to overlook.
Dixon's example: Google, which could have been
dismissed for its ability to send people immediately to good
results, at a time when search engine “stickiness” was prized, in
the era of display ads.
Dixon’s not the first person to reintroduce Thiel’s concept; last
September, Paul Graham, the cofounder of Y Combinator, also
wrote a blog post
about the idea that “most successful founders tend to work on ideas
that few beside them realize are good.”
Graham's example: Facebook, which initially sounded to
him like “a site for college students to waste time,” that tackled
a niche market, with no revenue model, to do things that didn’t
matter (like interacting socially: overrated).
The tougher part is that when you pick a winner, Graham says, you
won’t know it for two years. Measuring investment success after
Demo Day is a bad metric at best, and misleading at worst.
So how do you know you’re on to a good “bad idea”?
Good ideas that look like bad ideas have four characteristics,
Dixon
says:
- Powerful people dismiss them as toys (telephone, Skype) — innovator's dilemma; technology curve often outpaces demand curve
- They unbundle functions done by others. A newspaper is a bundle of functions: brand, curation, classified ads, distribution. Over time, each of those functions got picked off one by one: brand —> internet, curation —> Huffington Post, classifieds —> craigslist, distribution —> Twitter/Facebook/email, individual reporters now build their own audiences. Similar thing happening with university now with education being picked off by MOOCs e.g. Udacity, Coursera. The education system will be changed layer by layer.
- They often start off as hobbies. Business people vote by allocating money at the workplace; engineers vote with their time, by working on what they think the coolest stuff is on the weekends and at night. Very predictable heuristic: Homebrew Computer Club w/ Jobs + Wozniak; blogs; the web; many open source things; now it's Bitcoin, 3D printing, drones, big data frameworks.
Example: GitHub — work processes started with non-/semi-hierarchical groups in the hobbyist world trying to organize themselves; turns out there are very similar work processes in large organizations.
- They often challenge social norms. queasy feeling about Airbnb & eBay; Flickr defaulted photos to being public; Facebook released controversial news feed that is now the norm.
The best ideas, he says, are developed from direct experience with
technologies and local problems; another (obvious) method is to
look at trends, or develop analogies, like building “AirBnb for X,
or Uber for Y.”
The analogy startup is fairly prevalent in the Arab world, where a
good idea that works elsewhere can masquerade as a “bad idea” just
by virtue of its being deployed in a tough market where others
haven’t yet ventured. Localization can be the element that global
tech giants don’t see as worth their time.
Examples: The region’s Amazon, Vente Privée, One Kings
Lane, and Fab clones. GoNabit, Cobone, and the slew of daily deals
sites. Shopify for the Middle East. A Spotify or Hulu for the
region. One of the simplest huge successes: a better Tamagotchi.
Who thought the world needed that? But Paul Salameh is
killing it with Pou.
And yet, many of this region’s good ideas are simply good ideas. A device that tracks your heartrate as you swim? A bug tracking app that’s super intuitive? A panoramic photo app? Toys that teach engineering skills? A solar-powered irrigation device? All great ideas.
Yet most companies in this market can’t afford to wait two years
to see if the idea has traction. Risk-averse nvestors won’t
bite.
Also, for those willing to dig into building nuts and bolts
infrastructure, like web and mobile payment solutions, the
opportunities are big. In general, the “leftovers” not being
tackled by existing companies, and especially government, are a
large slice of the pie.
Yet in this market, failures are perhaps even more likely to be a
factor of revenue and business model than the product itself. Why
did Wild Peeta
close down its store and pivot just as Just Falafel is preparing for an
IPO? Wild Peeta's
new TV show might be much cooler than a sandwish shop, but the
difference between the two companies has never seemed to be a
function of their sandwiches. As Reid Hoffman recently
pointed out, the fundamental strategy of a startup is not its
product strategy, but its financing strategy.
So there’s no surefire recipe for a good idea. But this is one way
to get started.