The 2 Things About Your Start-up Idea That Actually Matter
BY Garry Tan
Y Combinator's Garry Tan hands you the only yardstick you need when starting a technology company. How does your idea measure up?
Regarding ideas, Google founder and CEO Larry Page has said this: "Even if you fail at your ambitious thing, it's very hard to fail completely. That's the thing that people don't get."
I've found that all too often, founders overlook this. The start-up landscape is littered with examples of less ambitious things people don't want. That's why on the first day of entering Y Combinator's start-up incubator program, each entrepreneur accepted is given a simple gray t-shirt that says: "Make something people want."
An even better mantra for start-up entrepreneurs, I propose, would be: "Make something a lot of people want a lot."
If you're going to create a product or service, consider these two simple things:
1. The severity of need addressed by your product or service.
2. The number of people who have that need.
The best—and often the most successful—ideas service a huge need for a huge number of people. These are highly profitable as Internet treasures. They practically sell themselves—and grow customers organically. They're viral because everyone who encounters them tells everyone else about this great new thing that makes your life better. The cost to acquire users can often be very low. Most of roaring wealth-engines we associate with consumer technology fit this scenario. VCs and angels jump out of bed in the morning with the thought that these ideas are out there to be funded.
The next-best sort of start-up ideas service a huge need for a smaller number of people. These types of ideas can be highly profitable as enterprise businesses. Because there are far fewer people who need this thing, you'll need to spend more time tracking down the people who need it. This means having a sales force, with prices high enough to justify that sales force. Fog Creek Software founder Joel Spolsky explains why enterprise software is sold in this way in his essay Camels and Rubber Duckies. He explains: "There's no software priced between $1,000 and $75,000. I'll tell you why. The minute you charge more than $1,000, you need to get serious corporate sign-offs. You need a line item in their budget. You need purchasing managers and CEO approval and competitive bids and paperwork. So you need to send a salesperson out to the customer to do PowerPoint, with his airfare, golf course memberships, and $19.95 porn movies at the Ritz Carlton. And with all this, the cost of making one successful sale is going to average about $50,000. If you're sending salespeople out to customers and charging less than $75,000, you're losing money." That's a lot of zeroes to add to a price tag. Depending on just how many zeroes, some professional investors will hum to themselves over their morning coffee at such prospects.
The next-best ideas service a smaller need, but serve a huge number of people. These are profitable, and will likely throw off enough cash to be an awesome lifestyle business. Since they're less essential to customers, though, it can be tougher to make money running one. For most founders, this is still pretty phenomenal outcome, and one that can spawn further innovation that kicks a company into the best scenario above. For investors, unless there's a clear way the small need now could become a much bigger need later, these types of ideas can be some of the toughest calls in the game.
The yet next-best ideas service a small need for a small number of people. Not to bear the bad news, but there just isn't enough firewood around to light this kind of blaze. Often founders who tackle these types of ideas likely don't believe in their own skills enough to tackle something larger, so they try to go after something that is "manageable." Paradoxically, these ideas can sometimes be absolutely filled with competitors, since everyone else tries to do these too. These are so common that the majority of pitches investors hear fall in this category. Those meetings will conclude with two letters: no. (Actually, the good ones say no. Most will say "needs more traction" or something else that sounds reasonable in case the investor turns out to be wrong about the idea.)
The worst ideas are the ones that don't solve a problem, or create more problems than they solve. People neither want it nor need it. Zero times zero equals zero. Many arrive on this path when they've focused too much on capabilities (i.e. "wouldn't it be cool if?") or what they want (i.e. to be rich, admired, successful), rather than what other people actually need or want. This is fixable, though. Just think about problems people have instead of cool tech or outcomes!
No matter what your assessment of the situation might be prior to launching your product or service, the tale of the tape will be determined during the course of execution: building it and getting users. Remember that your grand idea is worthless without it being manifest in the world. As CDBaby founder Derek Sivers said, ideas are a multiplier on execution. Should you find yourself with a low, zero, or negative multiplier on the idea side, the fix is simple. Change the problem you're solving. Address a different, bigger need that more people have.
It may seem obvious, but too many would-be founders embark upon the journey into the wilderness without this simple yardstick. Well, here it is: Go forth.
GARRY TAN is a partner with Y Combinator. He invests in early-stage Internet start-ups and helps them build world-class user experiences. Garry is a designer and software engineer who co-founded Posterous, and now runs Posthaven. @GarryTan