Week 1: Listen to the Waves

From my house in the heart of Silicon Valley, I can hop in my car and be on the coast in about a half-hour. I typically do this several times a a week and take my dog for a long walk on the beach. The beaches here in Northern California are often foggy and moody, and I do some of my best thinking while walking the coast, throwing a tennis ball for the dog, and watching the steady waves crashing up on the shore. 

But where do great startup ideas come from? Do they suddenly spring into your head during a long walk on the beach?

We’ll get to that, but first let’s start with a definition of entrepreneurship. The one I like to use comes from Harvard Business School professor Howard Stevenson: 

“Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.”

What I love about this definition is that it captures the notion that when a great entrepreneur sees opportunity, he doesn’t worry about whether he currently has the necessary resources to go after that opportunity. He may currently have no money, no team, no customers, no distributors, and no technology. But that doesn’t deter him because he knows he can put together whatever resources he needs. That’s what great entrepreneurs do.

That may be why you bought this book. Perhaps you see an opportunity and you’re ready to put together the right resources in order to pursue it. Over the next few chapters, that’s exactly what we’ll do. But let’s start by dispelling some common startup myths.

It all starts with thinking up an idea (no, it doesn’t).

The mythology is that startup success begins with some brilliant idea suddenly comes to you like a bolt of lightning that ignites your brain (and then you’re a billionaire by Tuesday). If you look at startup history, however, it’s actually very difficult to find examples where it was the idea that made a startup a success.

In fact, most original startup ideas fail. The Twitter team’s original idea was a podcasting app called Odeo. Instagram’s original idea was a mobile check-in app called Burbn. YouTube thought their main use case would be video dating. Slack’s original idea was a video game studio.

In all of those examples, the original ideas failed, but the teams still turned the companies into billion-dollar successes. My goal with this book is to make you operate like one of those teams.

Also, note that Mark Zuckerberg didn’t come up with the idea of social networking, Steve Jobs didn’t come up with the idea of personal computer or a smartphone, and Elon Musk didn’t come up with the idea of electric cars.  So it ain’t about the idea, it’s about the execution. 

Your idea is worth millions (not).

I hate to burst your bubble already, since you probably bought this book because you have a startup idea, but honstly your startup idea is probably worthless. All startup ideas are. Want proof? There are online marketplaces where you can buy and sell pretty much anything these days, yet there are no marketplaces for startup ideas. Nobody wants to buy ideas, so, by definition, they are worthless. As I tell my Stanford students, ideas are cheap; execution is hard. 

So, if success isn’t actually about thinking up an awesome startup idea, then where do great startups begin?

Paul Graham, co-founder of the acclaimed startup accelerator Y Combinator, wrote a great essay in which he says, “The verb you want to be using with respect to startup ideas is not ‘think up’ but ‘notice.’ The way to get startup ideas is not to try to think of startup ideas. It’s to look for problems.”

From my experience, this is exactly where most successful startups begin—with an entrepreneur who notices a problem worth solving.

Uber was born when a group of friends spent eight hundred dollars to hire a private driver and then listened to the driver talk about how much downtime he had every week, waiting for business. Airbnb was born when roommates in San Francisco needed to rent out a spare bedroom to pay the rent. Cisco was born when two computer administrators at Stanford were frustrated by slow network speeds. In all of these examples, the founders not only noticed a problem worth solving, but they also fell passionately in love with solving that problem. 

Max Levchin is one of the original founders of PayPal. He’s now Founder & CEO of Affirm, which offers a consumer-friendly alternative to credit card financing.  I had a chance to chat with him one afternoon about where the idea for Affirm came from.

“I was already kinda in love with solving financial services problems,” he said, (he had co-founded PayPal, after all), “and then I spent some time doing research on the credit card business, trying to figure out what opportunities might be there. The more I learned about the predatory practices of the credit card industry, the more enraged I became.”

He went on to talk about how the traditional credit card business works: high interest rates, late fees, and “the flip,” which means, if you miss a single payment, some credit cards actually hike your interest rate retroactively. Many credit card companies make most of their profits from practices like these, and learning about this enraged Max.

“So, I guess that’s how I founded Affirm,” Max said. “It was love plus rage.”

Today, Affirm has a market capitalization of five billion dollars and so many happy customers they’ve earned an NPS score of eighty-three—all because Max was a startup founder driven by “love plus rage.”²

You need a completely unique startup idea (wrong). 

When I ask my students to write a sentence describing the problem their startup ideas solves, there’s always at least one who submits some version 

of: “The problem our startup solves is that there is no product like ours on the market today!”

To me, this is like saying: “We’re going to make frog-flavored cookies because there are no frog-flavored cookies available today!” Maybe there are no frog-flavored cookies on the market today because nobody actually wants frog-flavored cookies.

If you really are planning to enter a market that has no existing products like yours, you’ll need to spend a lot of money creating demand where there isn’t any. You may still fail. Saying you are launching something that doesn’t currently exist is a big red flag for investors, and it should be for you too.

To put it another way, if you want to go into the cookie business, we already know that people spend millions of dollars on chocolate chip cookies, so selling chocolate chip cookies that are different in some way is much more likely to succeed than launching the first-ever frog-flavored cookies.

Gray markets can sometimes point you toward a problem worth solving.³ One of the most famous examples is digital music. In the early 2000s, college kids were busy sharing illegal music downloads, and the record labels were busy suing college kids and forcing Napster into bankruptcy. Steve Jobs saw this as an opportunity, created iTunes, and successfully convinced all the major record labels to sign on for one dollar per download, turning an underground market into a billion-dollar above-the-table business. iTunes begat Pandora, which begat Spotify, and now here we are.

Gray markets flourish where consumer demand gets ahead of the law. Lots of people rented out bedrooms against local laws; Airbnb came along and turned it into a four-billion-dollar business. Lots of private car companies flouted the oppressive taxi regulations; Uber came along and normalized it to the tune of twelve billion dollars. Throughout Latin America, there existed a large, informal market of people who would run errands for you. Three guys from Colombia founded Rappi to formalize this market, and they are now one of the fastest-growing companies in all of Latin America.

In my work with Miller Center for Social Entrepreneurship, we’ve graduated several successful microfinance startups, replacing predatory loan sharks in the developing world with normalized financial services. Again, the existing gray market of lenders proved market demand, and that provided opportunity for new startups to provide more structured, legal solutions. 

So, as you look for entrepreneurial opportunities, think about gray markets. The flourishing ones are often indicators of where consumer demand is ahead of the regulators and incumbents. There’s likely to be an opportunity there.

You’ll need to write a business plan (no, you don’t).

As I previously mentioned, there may have been a time when startup founders wrote business plans and investors read them, but that rarely happens anymore.

Steve Blank is the godfather of Silicon Valley startup methodology – I’ll quote him frequently in this book. He famously wrote that “no business plan ever survived first contact with customers,” and I’ve experienced this myself. I once spent four months writing a very detailed business plan, raised money with it, built a team around it, built a product around it, and then went out and met with prospective customers. Within about two weeks it was apparent that everything in my business plan was wrong.

Paul Graham has written, “The reason I don’t care about business plans is that I can learn more from five minutes of interrogating the founders than from ten pages of fluff they’ve written. The reason I don’t care about balance sheets is the same reason I don’t care who’s leading one hundred yards into a marathon.”

You may still want to write a business plan for your own benefit (I definitely

find that by writing about something I get better clarity for myself), but don’t think that investors will spend much time with it. Plus, I already told you that your original idea will likely fail, so why would you write two hundred pages about it?

Someone is going to steal your idea (no, they’re not). 

Some first-time entrepreneurs are hesitant to talk to anyone about their startup idea because they are afraid someone will steal it.

For the most part, I think this fear is unfounded. Most people aren’t interested in stealing your idea. Also, any great entrepreneur has the ability to tell the story without giving away any secrets, so this really shouldn’t be a concern at all.

Business is all about weighing the risks versus the benefits. In this case, you have to weigh the risk that someone is going to steal your idea against the benefit of talking to people, getting their input, asking for referrals, etc. In ninety-five percent of cases, I believe the benefits from sharing your idea far exceeds the risk that someone is going to steal it.

So, make a list of ten people you’re going to take out for coffee (or just have a call)—people whose opinions you trust, people who are subject matter experts, people who are prospective customers, random people you find on LinkedIn who you think might be helpful. You’ll be amazed at how willing people are to help, and you’ll be amazed at the value of the input and referrals you will get.

Passion is what matters (yes, always). 

When a startup founder is pitching, I want to see their passion shining through. I want to see that they’ve fallen in love with a problem worth solving and are passionate about solving it. The reason that matters to me is simple, really: running a startup is hard. It’s like running a marathon, except you don’t know where the water stations are or what the weather will be like. Also, there is no actual finish line. To be successful, you will need to be driven by something deep inside you. If I’m an investor looking at a startup, all I really care about is whether you have the grit to see it through to success. Underlying passion is the best predictor of that.

But walks are awesome. 

So go for a walk on the beach if that’s where you do your best thinking. Personally, I recommend the Wavecrest Open Space trail in Half Moon Bay, and then you can stop at Tres Amigos Taqueria afterward. Get the fish tacos.

As you’re walking and staring out at the waves, think about what matters to you. Most great startups begin with an entrepreneur who notices a problem worth solving and has a passion for solving it. 

That’s where our Launch Path begins.