What makes a great startup

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I spoke at McGill twice last week, once on Lean Analytics, and once on the consequences of Big Data for society. It was a lot of fun; it’s always good to filter the high-minded prognostications of the middle-aged through the inattentive ears of the young.

As often happens, one student asked me where I thought tomorrow’s hot tech startups would come from. This is the second-most-common question I get at universities, after “can you help fund/advise my company?”

My current answer is that we’ve grossly underestimated the impact that manufacturing at the edge will have on society. 3D printing is the visible tip of this iceberg, but it’s really about replacing supply chains with edge engineering, whether that’s through machine-optimized plant growth, or making new toys from the ground-up remnants of old ones, or printing spare car parts.

This student, however, wanted more. Which got me thinking—what is it that makes a truly great startup? My initial answer was that there are two key factors.

First: an idea that’s obvious in hindsight

  • Do you like streaming movies into your house?
  • Do you like buying music and books online?
  • Do you like hailing a cab with your smartphone?
  • Do you prefer to search the web by typing in what you’re looking for?
  • Do you prefer to have software automatically stay current, rather than upgrading it all the time?

Of course you do.

A successful business has to be so obvious, so blindingly stupid, that once it’s passed through the early adopter stage, the whole world will embrace it. This is the key to crossing the chasm into the mainstream.

The problem is that we have a kind of technology Stockholm Syndrome. We’re trapped by the way things are done today, and it’s really hard to see what could be, if we could only throw off the shackles of today. That’s why Blockbuster—which had customers, film licenses, and industry clout—collapsed under the weight of stores and employees while Netflix flourished, unfettered.

Here’s another example: it turns out cameras are for sharing pictures. Which is why the iPhone is the most popular camera in the world, according to Flickr; and why Kodak is going out of business. It wasn’t obvious ten years ago that the killer feature on a camera was an Internet connection; today, it’s so obvious it’s hardly worth pointing out.

Great founders are delusional enough to see the world as it could be for others. Don’t mistake this for seeing the world as you’d like it to be: You’re a lousy market. But if you can clearly see the world of cars, or smartphones, or social networks, or mass air travel, you have a much better chance of success.

Second: the baby steps to get there

I used to spend far too much time worrying about a company’s technology. Maybe that was right at the dawn of the Internet industry, but today, I spend much more time on their go-to-market strategy. I firmly believe that they can do what they say; I’m skeptical that anyone will care.

The winning startups don’t just anticipate the future. They also figure out the small steps needed to get the world from their current state to that future state without alienating them or weirding them out. Here are some examples:

  • Netflix knew that videos should be streamed, but broadband infrastructure wasn’t ready yet, and set-top-boxes didn’t exist. Today, we have ample network capacity and most console games can play Netflix movies. So what did they do? Simple: they mailed DVDs to people. This let them build the model, gain customer traction, and learn about user behaviors, pricing, and preferences. Mailing DVDs was a baby step.
  • When Uber launched in Seattle, it knew it needed a critical mass of drivers so that riders would get a ride quickly. So it hired many drivers to sit around and wait. It paid them $30 an hour to idle, and watch their smartphones for a ride request. Within a few months, the demand was big enough to switch those drivers to a commission structure. Buying the supply of limos was a baby step.
  • When Twitter first launched, it knew that the app worked well in a mobile model; but smartphones weren’t as common and the app wasn’t installed everywhere. So it let people send updates by SMS. That’s one of the reasons for the 140-character limit, after all. Today, few people use Twitter via SMS—but at the time it was a great baby step.
  • reddit started as a link sharing and voting site. Then it added comments. Then self-posts. And eventually a “reddit Gold” reward model. This wasn’t planned—the founders stumbled across these enhancements, gradually shifting the company from a link-sharing site to a thriving community that makes a significant amount of its money through donations. But voting on pictures is a fun and easy first step.

It might seem like these are consumer-focused; to some extent they are. But there are plenty of enterprise examples. Blackberry made it easy for sales executives to get a two-way pager, then backed into the enterprise IT world. Keynote Systems and Google Analytics offered basic services that anyone could deploy. Salesforce.com started with rogue salespeople and small businesses, but eventually became a strategic platform for big companies.

Two big questions

These are the two really big thoughts running through my head when someone pitches me an idea. First, is this something that will seem absolutely obvious in hindsight? If so, I believe in the problem. Second, have you found the baby steps it will take to get mere mortals there? If so, I believe you’re the one to solve it.