Why the Idea is Important (notes from “How to Start a Startup” Lecture 1)
Sam Altman has started a lecture series at Stanford that aims to teach entrepreneurs “How to Start a Startup.”
I’ve only made it partway through his first lecture, but have already found some of his insights compelling.
Here are my Top 3 Take-aways from Sam’s talk about Why the Idea is Important (0:00 to 15:02 in the video above):
The best startups seem like a bad idea, but are really a good idea.
This statement is basically saying that you should be a contrarian investor with your own sweat equity. If an idea is an obviously good idea, it probably means that a lot of other teams are chasing it, and it will be difficult to differentiate and compete. On the other hand, if you’re pursing something that seems like a bad idea, it means you have probably discovered some insight before others have — and that insight gives you the competitive advantage of time. You can occupy a position, start to build your solution, and acquire an installed base of customers, all before competitors realize that the opportunity exists. By the time the idea is obviously a good idea, you have become the first-mover and built momentum, and it’s harder for others to dislodge you.
The current market size doesn’t matter. The market size in 10 years is what really matters. You want to be in a small but rapidly growing market.
For B2C opportunities, this statement makes perfect sense. It sort of relates to the previous idea, that you want to pursue opportunities that seem like a bad idea today. If you tackle an existing large market, it will be difficult to dislodge existing incumbents. Instead, focus on a small (but potentially non-existent) market that will grow rapidly over the next 10 years. When Airbnb first started, the market for renting out an extra room in your apartment didn’t exist. Same story when Uber first started—the market for on-demand car transportation didn’t exist.
For B2B opportunities, I would add a caveat. Sometimes it’s easier to disrupt a large existing market than it is to create a brand new market from scratch. The reason is that B2B buyers already have existing budgets, that they can re-allocate to your startup if it disrupts an existing solution. It’s harder for them to “create” new budget than it is to re-allocate an existing budget. This is why business model innovation (e.g. open-source, cloud v. on-premise, freemium v. upfront license, etc.) often succeeds in B2B.
You can change everything in your startup except the market. So spend a lot of time up front to make sure you’ve thought through your market.
In my view, this is one of the most important take-aways from Sam’s talk. I wrote a post last year called “The Market Always Wins (Part 1).” I’ve expressed my perspective here in the title, but here are some key points from my post where I quote some respected investors:
In a great market — a market with lots of real potential customers — the market pulls product out of the startup.
The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.
The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.
Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.
You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.
(Quote from Marc Andreesen, “The Pmarca Guide to Startups: The Only Thing That Matters”)
The #1 company-killer is lack of market.
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.
(Attributed to Andy Rachleff, Laws of Startup Success.)
Overall, a great talk by Sam Altman so far. I’m still to get through the entire talk, but the section on “Why the Idea is Important” had a few key take-aways:
- The best startups seem like a bad idea, but are really a good idea.
- The current market size doesn’t matter. The market size in 10 years is what really matters. You want to be in a small but rapidly growing market.
- You can change everything in your startup except the market. So spend a lot of time up front to make sure you’ve thought through your market.
