Startup Mistakes - Market

Now that I’ve shifted my energy to investing in startups full-time, I spend a lot of time reflecting on my 10+ years as an entrepreneur and all the mistakes I made along the way.

The other day I had a thought that, if a startup could avoid making all the traditional mistakes that startups tend to make, then they’d have a higher likelihood of succeeding. So I spent a few hours reminiscing on all the times I had made what was likely the wrong decision as a startup founder and CEO and compiled an outline with the intent of helping our portfolio companies make difficult decisions.

While this type of general startup advice has been done to death, there are a handful of thoughtful essays that I believe are incredibly important to comprehend regarding the underlying principles and axioms of startups and startup success. The essay that many entrepreneurs come back to is Marc Andreessen’s seminal essay on markets entitled The only thing that matters.

This essay, as well as Paul Graham’s YCombinator motto: “Make Something People Want”, at their core are describing the basic economic principles regarding a population of people who are demanding a product or service (aka “they want something”). In the case of a startup, the exact thing they want hasn’t been defined yet – so you, the entrepreneur, has to “make” it.

Markets & Timing

In some cases, people are going to explicitly be telling you exactly what they want. However, markets are incredibly efficient and in these cases there will usually already be competing products in market unless you are incredibly lucky with timing.

This is why timing is so important. You invariably want to be right at the cusp of new demand - either by being the first mover to a market, or by actually creating the market entirely yourself. These new markets are generally amalgamations of other products or services or services that leverage new “enabling” technologies to shift demand to a new paradigm.

Take the “enabling” technology of mobile phones. Mobile phones enabled you to access information from anywhere in the world, and it also served to connect billions of people who weren’t otherwise connected to the internet or used it sparingly.

In 2007-2010, there was an explosion of new startup activity around Mobile, because the platform was enabling new, more efficient ways to do so many regular things that we humans needed and wanted to do everyday. Foundational things like order food, talk to friends & family, find information, interact with businesses, etc… became much more accessible and productive on mobile than ever before.

This enabled a number of valuable companies since the first mobile solution for any given problem space was very commonly transformative and therefore great products more easily achieved mass adoption simply because their new platform (mobile) was just that valuable when applied to pretty much anything.

Technology, like knowledge, is aggregative. It’s usually these enabling technologies that serve as stepping stones for our next waves of innovation. Today, these are things like cheaper, more resilient materials, cheaper and more efficient energy generation and storage, machine learning and artificial intelligence, and blockchain technologies to name a few.

If you build it…will anybody come?

Whether people will want what you’re building is a somewhat nuanced question that is difficult to entirely predict until you have the finished product and attempt to sell it, but you can derive signal on the question of demand by doing two things:

  • Talking to potential customers
  • Analyzing customer usage to examine if their words match their actions

If you do these two things consistently, over and over and in quick succession, you will usually arrive at a reasonably improved solution for the market and they will reward you by shifting their demand to your product. There are both artful and skillful aspects to doing both of these things, while concurrently ensuring you can deliver your end product with powerful economics (read: high gross margins, profitably).

This “talking to customers and learning from customers” is one of the core tenets of Steve Blank’s “Get out of the building” exercise on Customer Development in Four Steps to the Epiphany.

Paul Graham refers to getting out the building as one of those things that doesn’t scale.

The best market is one that doesn’t exist yet

What Steve Blank and Paul Graham allude to, but don’t explicitly mention is that you usually aren’t looking for a market that exists. It’s not going to magically appear in front of you when talking to a customer.

Markets are incredibly efficient. If a new idea was truly obvious, it would likely exist already (see: efficient market hypothesis).

In reality, you’re going to have to take pieces of different conversations and piece them together to create demand - to literally allow these tidbits of customer demand to “pull the product out of thin air” as Marc Andreessen so eloquently put it.

This is ultimately the best situation to be in, because you’re the first mover and can often leverage network effects, and economies of scale, and financing strategies to ensure you are the only player in the space (see Uber), thus ensuring concentration of demand and total monopolistic price control.

Because, as nice as it is to win, in reality, competition is for losers.

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