Business Models

One simple decision: The secret of Trader Joe’s lasting success

jitha

Trader Joe’s is one of the most successful grocery chains in the US.

In 2008, BusinessWeek reported that the company had the highest sales per square foot of any grocer in the United States.

In 2016, Fortune magazine estimated the sales to be $1750 per sq. ft. More than 2x Whole Foods, with a much larger footprint.

And to top it off, Trader Joe’s was one of the fastest retailers to recover from the COVID-19 lockdowns in 2020. As of Oct 2020, Whole Foods traffic was down 20%-30%, but Trader Joe’s had almost fully recovered.

I work in retail too, so I was quite impressed. And intrigued. What creates such sustained leadership?

So, when I heard that Joe Coulombe’s memoir had just been published (from this tweet by Sajith Pai), I immediately got the book and dug in.

Becoming Trader Joe is about the first 30 years of the business – 1958-1987.

As I looked at all the strategic decisions that made Trader Joe’s (TJ) a retail powerhouse, one thing struck me.

There weren’t that many decisions!

Peter Thiel loves to ask, “What’s your secret?”

And boy, Trader Joe’s has a secret. And it’s hidden in plain sight.

Don’t make 100 decisions when one will do.

This is my favorite Peter Drucker insight: “Don’t make 100 decisions when one will do”. I wrote about it in How to manage your team LIKE A BOSS (even while working remote):

Yes. No. Reject. Accept. Counter-propose. Invest. Hire. Don’t Hire.

Making decisions is tiring.

Whether a decision is big or small, there is some overhead to making good decisions. You have to debate the choices, reflect on them, make the decision, and then follow-through to execution. Making decisions takes something out of you.

As a self-interested manager, it’s clear where you want to go – make fewer decisions, but get the same output. i.e., managerial leverage.

How do you make fewer decisions? By focusing not on tactics, but on strategy. Not on the chaos, but on the concept.

By not deciding on each specific choice you’re asked to make, but by laying out a principle for all such choices. So that your teams can make these choices on their own – you don’t need to decide on that topic again.

Now, Drucker said this about team management, not business strategy. But it applies here too.

Joe made one decision back in 1958. One simple decision. 64 years ago. And it still has ramifications today.

“I will have the highest paid employees in retail.”

This simple decision has reverberated through the years, making TJ what it is today. This one statement is the secret of Trader Joe’s success.

We think of business strategy as a series of interlocking decisions. Like the 4Ps we learned about in Marketing Strategy 101. Product, Price, Place, Promotion (sometimes there’s a fifth – People).

But far more often, it’s not that many decisions.

It’s only 1 or 2 key decisions. The rest is an iterative search through option space, to find the one configuration that fits.

Strategy is not drawing mind-maps in an ivory tower.

Instead, it’s a furious search for the magic pattern where everything just clicks.

Top 1 Tom Cruise GIFs by jdub85 | Gfycat

But Minority Report is not the perfect analogy. In fact, strategy is a lot like the game of Wordle.

Unless you’ve been living under a rock, you know what Wordle is.

The aim of Wordle is to guess a five-letter word. But you don’t have to guess all five letters individually. If you’re lucky and you get one letter at the right place (i.e., it turns green), sometimes the whole word becomes easy to guess.

That’s how it was with Trader Joe’s.

One simple decision. Which drove everything that Trader Joe’s did. And created a lasting, successful retailer.

I will have the highest paid employees in retail.

But before we get into that, let’s appreciate how radical this decision was (and still is).

Grocery retailers win by keeping costs down.

The assortment across retailers is largely the same – they all carry the same mass consumer brands. They win by becoming the place for customers to shop.

  • wider assortments (which mean larger / more stores = high real estate costs)
  • better deals (= lower prices)

Ergo, you need to keep employee costs down.

But Joe went in the opposite direction!

He said he wanted to keep employee costs up. And if they weren’t high enough, well then raise them some more!

Which made all the downstream choices radically different too.

#1: It drove the choice of consumer.

If you’re going to have the highest paid employees, you need to have the highest gross profit. Which means:

  • You need high-margin products.
  • You also need high productivity on these products.
  • Therefore, you still need to offer great deals

Joe hit upon a target segment that ticked all the boxes: “overeducated but underpaid consumers”.

These consumers will make highly discretionary purchases, that would be more expensive. In 2022, these are the folks who buy alternative milks instead of full-fat dairy.

But because they’re underpaid, they’ll also be looking for bargains on these products.

So, if you can give them a great bargain on high margin products…

#2: It drove the choice of product assortment.

If you need to make higher margins than other retailers, you need to carry different products.

Every other supermarket in the 1960s carried the same popular brands from Procter & Gamble and other consumer majors. So, TJ went the other way – only private labels and unbranded products.

But not just any product. Only those where Trader Joe’s could offer a better quality at a lower price. While making a great margin.

Sounds hard? Well, lucky that TJ had the best employees in retail…

This was the most interesting part of the book.

Every retailer has a buying / procurement function. But Trader Joe’s made that its core differentiator. It focused on it so sharply that it cut through the noise.

In fact, TJ didn’t have a fixed assortment. It kept evolving, to ensure that this remained its core differentiator.

TJ changed its positioning 3 times in 3 decades, with focus on its core customer all through.

A. In the 60s, Trader Joe’s positioning was “Good time Charlie”.

In the 60s, California (where TJ started) had very protectionist laws around sale of alcohol. But Joe and his team read the laws with a magnifying glass, and found loopholes that others didn’t.

They hunted around to buy an old alcohol license, so they could get grand-fathered into new regulations with lower import tariffs.

And so, while other neighborhood grocery retailers couldn’t carry any alcohol, Trader Joe had the widest assortment of the best wines, at the lowest prices.

Wines for the sophisticated palate, at affordable prices (remember: overeducated but underpaid?).

B. In the 70s, “Whole Earth Harry”.

California relaxed its regulations on alcohol in the early ’70s. TJ no longer had any differentiation there. So it shifted – following its consumers – to focus on sustainability and safety.

The assortment changed:

  • Albacore fished on long lines instead of nets, to be cruelty-free
  • Cold pressed peanut oils
  • Phosphate free detergents

The company also introduced creative ways to nod to its consumers’ sophistication.

→ Produce with vintage printed on the box – like wine. “This corn was harvested in Spring 1975”.

→ Private labels with literary allusions – Sir Isaac Newtons, Bagels Spinoza, etc.

All to cater to this overeducated consumer target segment.

C. In the 80s, “Mac the Knife”

As other retailers caught on to the sustainability fad, it was time for TJ to change – yet again.

It went back to the roots of what it means to be a retailer.

The company outsourced everything else (I wrote about this in “Sell the Mailroom!”), and focused on its core value proposition. Buying and selling.

“All the best products, at the best prices”.

No fixed assortment. What you see today in store might not be there tomorrow. This created FOMO among all its loyal consumers.

And the P&L didn’t lie.

In those 10 years (1977-1987), the company quadrupled revenues and grew profit nearly 9 times!

#3: It drove the choice of location.

Trader Joe’s was a neighborhood grocery store, but it couldn’t be in just any neighborhood.

To have the highest paid employees in retail, you need the highest sales throughput. So only the best locations, where productivity could be high enough.

And all stores were near major institutes of learning, corporate offices, or retirement villages. Where the target segment was likely to be.

All these downstream decisions, chosen almost by default after that first decision.

But the most powerful part – the secret – was how it made Trader Joe’s unmatchable.

Without making the same choice – “I will have the highest paid employees in retail” – no other retailer could compete with Trader Joe’s.

That’s the real secret of Trader Joe’s success. That the entire strategy turns on this simple decision – you cannot beat Trader Joe’s without making this decision.

In a sense, this decision became TJ’s moat.

The secret of Trader Joe's success

“Highest Paid Employees” as Trader Joe’s moat.

Whether Joe Coulombe predicted it or not, this mantra gave TJ immense defensibility. So much so that even now, 60+ years later, it’s one of the US’s most profitable retailers.

It reduced attrition. And improved customer service.

The retail industry is notorious for staff attrition. You hire someone and train them well, and then they leave.

Not at Trader Joe’s.

Folks in stores were paid as much as, or more, than people in desk jobs at HQ. So, not only did they not leave for greener pastures (there weren’t any!), they also didn’t clamor for a promotion to HQ!

And when you have low attrition:

  • You have low training costs
  • You have better customer service

It created durable consumer trust and loyalty.

By honing its buying capability, TJ created consumer trust. People who shop there know that they’re getting bargain prices, on the best products. They will not get these prices anywhere else, or at any other time.

This creates two emotions in consumers, which seem opposite to each other:

  • Loyalty: “I know Trader Joe’s will have the products I want, at the best prices.”
  • Impulse: “This product is at a great price! I better buy it now, they might not have it tomorrow!”

Now, these two advantages are great. But you can lose them over time.

If not for the most important driver of defensibility…

You get what you pay for.

By having the highest-paid employees in retail, Trader Joe’s also got the best employees in retail.

Not rule-followers, but maximizers. Not processors, but improvisors.

The first COVID lockdown in 2020 was a great illustration of this. Remember when consumers were panic buying everything? Remember the toilet paper shortage?

From the company’s podcast in May 2020 (Episode 25):

Tara (Marketing Director): Let’s go back a little bit because I want to talk about some of the things that the folks on our buying teams, very specifically, were doing during that phase of this that was really the huge impulse. Almost like a panic buy.

Matt (VP Marketing): The buying team was calm and methodical and really looking at ‘what do we need’ and ‘how can we best fill that need’. And it turns out by looking in places other than the usual places. You might see a five pound bag of rice where we previously only sold a one pound bag of rice.

Tara: I’m going to share the toilet paper story. (laughs)

I opened up my email one morning and there was an email from someone I didn’t know who was an executive at an international hotel chain saying, “Our business is down. We’re not using a lot of the things that we’ve contracted for. We have some of this, we have some of that.”

So I forwarded that email to the folks who manage our buying teams and I instantly got a message back from one of the folks on our buying teams who just said, “Toilet paper!!” with big exclamation marks at the end. Within a week and a half, we had made a deal to buy toilet paper from this large international hotel chain that suddenly didn’t have guests staying in their hotel rooms. You get to a Trader Joe’s when they have it in, because it comes and it goes and it’s, you know, it’s there and then people buy it and it’s gone. And it comes back. But we’re selling individual rolls of toilet paper that were originally intended for use in hotel rooms.

Matt: Those weren’t retail ready packages and specifically they didn’t have what’s known as a universal product code, the barcode, the UPC, so these didn’t scan at the register. And for a lot of retail businesses, that would be a make or break deal. But we figured out that, you know what, our crew is smart, they’re capable, we can figure out how to do this. We can ring it up manually. And that’s what we’ve been doing. I just love how it’s summarized in this store sign that I saw…I’ll just read the sign to you. “April break getaway canceled? Don’t worry. Now you can enjoy a hotel toilet paper experience in your own bathroom.”

When you pay top salaries, you get top people.

Sometimes, moats (and secrets) endure.

When Joe Coulombe quit TJ in 1987, he told the team that the true test of his leadership would be in the years after he left.

Coulombe was succeeded as CEO by John Shields, who was at the helm from 1987-2001.

In that time, the company expanded out of California – to Arizona, the Pacific Northwest, and the East Coast as well.

Between 1990 and 2001, Trader Joe’s quintupled its number of stores. And grew profits ten-fold!

I’d say Trader Joe Coulombe passed that test with flying colors.

Patents are not the constraint!

jitha
vaccine patents

There’s been a lot of public outcry about patents for the COVID vaccine. About how the US needs to forcibly waive IP rights of the pharma companies. As the rationale goes, this will help other countries manufacture the vaccines faster, and help us defeat COVID-19.

Sorry folks, but this is a waste of time.

Yes, there are things we can do (and we are morally obligated to do) to save millions of lives. But waiving vaccine IP is – quite fundamentally – not one of those things.

Revisiting the Theory of Constraints.

I wrote about the Theory of Constraints in The Grand Unified Theory of Management.

The Theory of Constraints is a set of three simple statements, in a tightly connected chain of logic:

#1: Every system has one bottleneck tighter than all the others.

A limiting factor more limiting than the others. A weakest link in the chain.

#2: The performance of the system as a whole is limited by the output of this one bottleneck.

If you increase the throughput of this one bottleneck, the throughput of the entire system increases.

#3: Therefore, the only way to improve the performance of the system is to improve the output at the bottleneck.

What does this mean? It means that any improvement not at the constraint is an illusion. For the same reason there’s no way to strengthen a chain without strengthening its weakest link.

You can do your best to increase capacity of all the non-bottleneck steps. Or, when you realize there’s actually excess capacity at all these steps (by definition – when the bottleneck is at full capacity, all other steps have excess capacity) you can do your best to fill them up.

But it will make no damn difference at all.

Stated even more simply, this is the Theory of Constraints:

Any system with a goal has one limit. Worrying about anything other than that limit is a waste of resources.

So, is Vaccine IP the bottleneck to worry about?

To answer this question, we must first ask another one. “If we open-source the vaccine patents, will it increase the near-term supply of vaccines to the world?”

Unfortunately, it won’t. Because the critical constraint, the “rate limiting step”, is elsewhere.

Derek Lowe talks about the real manufacturing bottlenecks, in Waiving IP:

An obvious first problem is hardware: you need specific sorts of cell culture tanks for the adenovirus vaccines, and the right kind of filtration apparatus for both the mRNA and adenovirus ones… A good proportion of the world’s supply of such hardware is already producing the vaccines, to the best of my knowledge.

Second, you need some key consumable equipment to go along with the hardware. Cell culture bags have been a limiting step for the Novavax subunit vaccine, as have the actual filtration membranes needed for it and others. These are not in short supply because of patents, and waiving vaccine patents will not make them appear.

Third, you need some key reagents. Among others, there’s an “end-capping” enzyme that has been a supply constraint, and there are the lipids needed for the mRNA nanoparticles, for those two vaccines. Those lipids are indeed proprietary, but their synthesis is also subject to physical constraints that have nothing to do with patent rights, such as the availability of the ultimate starting materials…

Fourth, for all these processes, there is a shortage of actual people to make the tech transfer work… Moderna, for one, has said that a limiting factor in their tech-transfer efforts is that they simply do not have enough trained people to go around.

Don’t believe me? Moderna has open-sourced its patents, and committed that it won’t enforce them. So where’s my generic mRNA vaccine?

Pharma patents spell out everything you need to create the vaccine. The “recipe” is online, there are no “secrets”. Why then are China and India not producing them? Did they suddenly develop “scruples”, in the most urgent crisis of our time?

Astra Zeneca, Novavax, J&J, and others have licensed their technology to other manufacturers (albeit not for free). Why are these other players struggling to manufacture enough?

Taking one more step back: forget COVID vaccines. Why is even manufacturing of generics and other vaccines concentrated in a few countries? India manufactures 60% of all vaccines. Why do other countries not manufacture their own?

Maybe, just maybe, patents are not the constraint?

Say it with me:

Any improvement not at the constraint. Is. An. Illusion.

What is the bottleneck then?

I’m not an expert, but these are four prime candidates (from Alex Tabarrok’s Patents are Not the Problem!:

  • Raw material availability. If there’s anything we need public outcry on, it’s this. The US has been hoarding raw materials, crippling global vaccine manufacturing capacity.
  • Manufacturing capacity. This one will be harder to resolve in the medium-term.
  • Supply Chains.
  • Plastic bags. Yes, plastic bags are a bigger constraint than patents.

Once we resolve the above manufacturing bottlenecks, a new one will likely crop up – people’s ability to pay for the vaccine.

So let’s think about that.

How do we make vaccines cheap enough for everyone?

This is not yet the constraint, but it could be once there’s enough vaccines to go around. So how do we make them accessible?

There is an economic cost to producing these vaccines. Raw materials, capital equipment, manpower, and yes, licenses too. Who bears the cost?

It’s very easy to say, “these big pharma cos are evil capitalist profiteers”. Pfizer, for instance, expects to make USD 26B in sales (not profits, mind) on the vaccines.

But the question to ask isn’t, “How are pharma cos allowed to make so much money?”

The question to ask is, “USD 26 Billion? That’s all?!”

The economic cost of COVID-19 in the US alone is USD 16.2 trillion. The Economist says the GDP impact on the world will be USD 10 trillion+. Long-term health impairment and deaths will be over and above that.

And there are tons of other risks to worry about – geopolitical, societal, etc.

So, the right question to ask is this: “If the cost of not vaccinating is 1000x the cost of vaccinating, then why aren’t governments stepping up and making vaccines free?”

“But Jitha, some governments can’t afford it!”

Red herring. What they can’t afford, is the cost of not vaccinating, which is 1000x more. But they’re paying that cost anyway.

Let me put it more bluntly. The cost of a vaccine is much lower than the cost of an oxygen concentrator. Sometimes, it is that simple a tradeoff.

Governments of the world: Stop making people and pharma cos pay for the vaccine. Do it yourself – it’s an amazing deal. The best deal you’re getting this year. Hell, it’s even better than buying bitcoin for your treasury.

Counterfactual – what if vaccine patents did eventually become the bottleneck?

I don’t think vaccine IP will become the bottleneck for the next two years at least. But let’s say I’m wrong. If it does, then does waiving the IP make sense?

A cardinal principle of economics is: Don’t silence prices in order to transfer incomes. (link)

Don’t steal the patents from pharma cos and destroy their incentives. Remember, they are among our heroes of the pandemic. They’ve developed vaccines at unbelievable speed.

I won’t even go into the logic of it.

I won’t talk about how Moderna wouldn’t even have existed as a loss-making company for so many years, investing in mRNA tech, if it weren’t for the potential returns on investment from a market system.

I won’t talk about how this incentive is all that’s needed, for pharma cos to take risks. Governments don’t have to compensate Sanofi, Merck, etc. for their failed vaccine efforts.

No, please don’t steal the patents and leave us unarmed for the next pandemic.

Instead, buy out the patents and then open them up. As Caleb Watney says in How the US can solve the global vaccine shortfall, the US government can and should buy out the patents of the pharma companies. And then open them up to the world.

Why should they do it? Again, because it’s such an amazing good deal!

Pay USD 100 billion, and save USD 16 trillion. 160x return. Really? We’re even debating this?

Hope you liked the article. If you’d like to receive more such articles directly in your inbox, don’t forget to subscribe to Sunday Reads!

The best of Jitha.me – A Compilation

jitha

Today I send out the 100th issue of Sunday Reads. It’s a good time to look back.

So I’m compiling some of the most well-received articles I’ve written over the last few years. On startups, business and management, and on mental models that make us more effective at what we do.

Hope you find the articles useful! Don’t read them all at once. Read whatever catches your fancy. You can always come back later ?.

[PS. It’s also a good time to subscribe if you haven’t. You’ll get issue #101 next Sunday. I promise you won’t regret it.]

The World of Startups

How to save yourself from a bad startup idea that looks good.

(Go to article).

This is an article I wrote in late 2015, a couple of years into my startup and when I was just starting OperatorVC, the angel fund I invest through.

It struck a chord with readers. It still gets 100+ views a week (and ranks in top 3 on Google for “bad startup idea”) despite being not very optimized for search.

We have plenty of startup ideas. Many of them are bad, and we dismiss them right away (or our friends warn us off the idea).

They’re the easy ones.

The dangerous ones are the ideas that look quite good. The ones that give you goosebumps, and then three wasted years.

In this article, I list some of the common patterns that such plausible (but actually bad) ideas have, so that you can spot them early and save your time.

Read on here.

On a related note: Why describing your startup as the “Uber of X” is a bad idea. Yes, despite what Y-Combinator says.

How Uber solved its Chicken and Egg problem (and you can too!).

(Go to article).

Some of the most exciting companies of the 2000s are multi-sided networks. Think Uber, or Airbnb, or even ecommerce marketplaces. They’re massive, and they have immense defensibility.

Anyone who wants to compete needs to get both suppliers and consumers, at the same time.

That’s the proverbial chicken and egg problem. How do you get consumers when you don’t have suppliers, and vice versa?

Turns out there are four specific ways you can solve the chicken and egg problem.

Read on here for examples of each of these solutions.

I’ve also captured it as a framework on Slideshare, that you can download.

Your Minimum Viable Product can be more minimum than you think.

(Go to article).

Most of us in the startup community understand the concept of a Minimum Viable Product, or MVP. It’s the most basic version of your product that still delivers your core offering.

Aiming for an MVP helps entrepreneurs (especially first-timers) avoid the rookie mistake – building too much product before validating market need. We all want the ten revolutionary features in our first version. But not only will these features take five extra months to build, most users will also not see them.

So that’s the concept of an MVP. Sounds simple, right?

And yet, we slog for 3 months to build the MVP. And congratulate ourselves on finding out it didn’t work, and then spend another 3 months on a pivot.

Three months is way too long! Why does the MVP take so long?

The reason is that we’ve got the notion of an MVP all wrong.

Read on here.

The World of Business and Management

What I learnt from talking toilets in rural Bihar.

(Go to article).

My last project in consulting (back in 2012) was to develop a market-based solution to the problem of sanitation in rural Bihar (one of India’s poorest states).

At that time, less than 20% of households in rural Bihar had toilets. And many of those who did have toilets, didn’t use them – they would defecate in the open instead.

Against this intimidating backdrop, we set out to build a private-sector led solution to the problem.

And we were fairly successful. The project helped over 500K rural households construct toilets in their homes. It increased the number of toilets in our focus districts by 10 percentage points.

This article talks about the timeless lessons I learned through the project, on markets, consumers, and how to sell.

On a related note, the job to be done framework. Or, as they say, “You don’t sell saddles. You sell a better way to ride.”

What doesn’t get measured… doesn’t exist?

(Go to article).

We’ve all heard the saying “What gets measured, gets managed”.

A simple, yet powerful thought. With a simple corollary – what doesn’t get measured, doesn’t get managed.

But in reality, the corollary is far more extreme.

In the eyes of the person responsible, what doesn’t get measured… doesn’t really exist!

Read on here, to see the dark flipside of this common management adage.

On a related note, the Availability heuristic. Or “what you see is all there is”.

How to manage your team LIKE A BOSS (even while working remote).

(Go to article).

This is a more recent, and more topical article.

Effective team management (whether in-person or remote) can be distilled into five key axioms.

Call them the Minimum Effective Dose, or the 80:20 of team management.

Team management 101

Read on here .

Hiring Great People.

(Go to article).

This links back to the previous article. You can only work with people you end up hiring. So, hiring well has an inordinate influence on your team’s future output.

Hire well, and you have an NFL Dream Team. Hire badly, and at best you get a squabbling dysfunctional family. Not much effective team management you can do there.

In the same vein as the previous article, here are 7 key learnings on hiring.

1. Hire only when you absolutely need to.

2. Don’t be too hard on yourself. 1 in 3 hires don’t work out – if you do it right.

3. False Positives are OK. False Negatives are not.

4. What to look for in candidates: drive and self-motivation, innate curiosity, and ethics.

5. A few tips for running an interview process. Most important one – do reference checks.

6. How to let people go. Decisively, but with sensitivity. It’s your fault – not theirs – that you hired them into a role where they can’t succeed.

7. Diversity will not happen on its own. You’ve got to make it happen.

Read on here.

The World of Mental Models

What are “mental models”?

They are tools that help us understand the world faster and better. Instead of approaching every new problem from scratch.

Simple but powerful concepts, that help us understand situations more clearly, and make quicker yet better decisions.

For example, take this core principle from economics: “There ain’t no such thing as a free lunch“. It reminds us to look at every wonderful business deal with care. What’s the catch? There’s always a catch.

In a way, mental models help us think in a more “modular” fashion.

Modular programming makes software much faster. In the same way, mental models are the modules that soup up your decision-making engine.

Mental models are the modules that soup up your decision-making engine.

Over the years, I’ve written about a few powerful mental models, that have helped me think faster (and better) about business problems.

Listing a few of them below.

Hope you like some of these articles!

Do write back or comment with the articles you liked best, and I’ll share more on those topics in the coming weeks.

And don’t forget to subscribe, so you get issue #101 of Sunday Reads!

The Fat Startup Experiment

jitha 4 Comments

Is the Lean Startup dead?

If there’s any ideology that’s gone from radical idea to article of faith in less than a decade, it’s “Lean Startup”.

When the idea was first proffered by Steve Blank in the early 2000s, it took the world by storm. A simple idea. That generated so much momentum for a startup.

And by 2007, everyone could point to Facebook – or even better, Twitter – as proof that Lean Startup works. Facebook at least scaled with a consistent vision. Harvard → other universities → the world. Twitter was the original clown car that pivoted its way into a gold mine .

I’m a strong believer in starting up lean.

It’s how, in a past life, I iterated my consumer loyalty app to 200K users… with zero marketing dollars. Or how we launched a new lending segment at Indifi, and made it our top segment in 6 months.

I’ve also written about it scores of times.

So yes, Lean Startup works. And it is an article of faith. The word “lean” is almost redundant today. Of course a Startup has to be Lean. Of course you first build an MVP and test it with customers. Raise serious money only when you find product/market fit.

And then there’s Quibi.

Quibi raised USD 1.75 billion two years before launching its first product.

It then went on to raise another USD 750 million a year after that. Still a relaxed one year before launch.

If you haven’t heard of Quibi, you’d be forgiven to think it was a rocket company to rival SpaceX. But no, Quibi is a mobile content platform (short for Quick Bites), which launched a month ago.

The antithesis of Lean Startup. Will it work? Is this how we’ve got to do it now?

Get Big Fast Baby[1]

The first insight about Lean Startup is that it bootstraps leverage from scratch.

As Ben Horowitz says in The Case for the Fat startup:

There are only two priorities for a start-up: Winning the market and not running out of cash

Every start-up is in a furious race against time. The start-up must find the product-market fit that leads to a great business and substantially take the market before running out of cash.

That’s where leverage helps. Maximize the ROI on the cash, people, or other resources you bring to the business. Win the market as fast as you can, before you run out of cash.

Now, there are many types of leverage a startup can have.

  • Proprietary IP / best-in-class technology
  • Regulatory capture: Microsoft scaled only because of their hilariously one-sided deal with IBM[2].
  • The product itself: Instagram has in-built virality. In its early days, Instagram’s core use-case was to touch up photos, and post them on Facebook or Twitter. So, by simply using the product, you were marketing it to your friends.
  • Network effects: Uber

The revolutionary suggestion of the Lean movement was that the process itself could generate leverage.

Create hypothesis → Test → Observe results → Refine hypothesis → Repeat.

That’s how Lean Startup works. Start with a hypothesis: product X solves problem Y for consumer Z. Test it in the most basic way possible, and iterate and refine.

Such a simple process, but generates such strong momentum.

It’s like you try to lift yourself by your shoelaces. You wouldn’t expect it to work, but magic, it does!

The first insight about #leanstartup is that it bootstraps leverage from scratch. The process itself generates momentum.
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Now here’s the thing – the leverage could simply be intuition.

The founder of Quibi is Jeff Katzenberg.

His catalogue of accomplishments is stunning. He oversaw The Lion King (the original), Beauty & the Beast, Aladdin, etc. at Walt Disney Studios. Then he co-founded DreamWorks, and produced Shrek, Kung Fu Panda, Madagascar, and several other massive hits.

Jeff knows more about film-making than 99.9% of the world’s population. Combined.

And the CEO of Quibi is Meg Whitman, ex-CEO of HP and eBay. A tech veteran.

Katzenberg and Whitman have boatloads of intuition, sharpened by decades building large media and tech companies.

Katzenberg recognizes this. In an early interview, back in 2019,

“I said to Meg that, until day one, every decision that we make around content will be driven by instinct,” Katzenberg said. “Minutes after we launch, everything will be driven by data.”

And it’s true. They’ve doubled down, extracting every ounce of instinct from their extensive experience.

Everything was so meticulously planned. From the same interview:

  • A launch date a year in the future (and they were bang on time)
  • Crystal clear financial model for funding content production
  • Firm view on pricing tiers for the app

No testing hypotheses with an MVP. Just dive right in. With a few billion dollars in the bank.

What do you do when there’s no leverage?

The second insight about Lean Startup is that it was an answer to a specific question, posed at a specific point in time.

As Steve Blank says, the idea of the Lean startup was built on top of the rubble of the 2000 Dot-Com crash.

Most entrepreneurs today don’t remember the Dot-Com bubble of 1995 or the Dot-Com crash that followed in 2000. As a reminder, the Dot Com bubble was a five-year period from August 1995 (the Netscape IPO) when there was a massive wave of experiments on the then-new internet, in commerce, entertainment, nascent social media, and search.

After the crash, venture capital was scarce to non-existent. (Most of the funds that started in the late part of the boom would be underwater). Angel investment, which was small to start with, disappeared, and most corporate VCs shut down. VCs were no longer insisting that startups spend faster, and “swing for the fences”. In fact, they were screaming at them to dramatically reduce their burn rates. It was a nuclear winter for startup capital.

The Lean movement started during a nuclear winter for venture capital.

The idea of #leanstartup was built on top of the rubble of the 2000 Dot-Com crash.
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When capital is scarce, you have no choice but to go Lean.

When capital is not scarce, it’s worth considering whether other forms of leverage can help you win the market faster.

Well, today, capital is not so scarce. And it’s chasing fewer good deals.

Capital going to fewer companies
Source: State of the Venture Capital Industry in 2019, Toptal
Supergiant funding rounds going up
Source: State of the Venture Capital Industry in 2019, Toptal

If you can raise the capital, it makes sense to go big, and go fast. Correct mistakes along the way. Figure out product/market fit as you go.

Thin was in, but fat is where it’s at.

Will Lean Startup have a resurgence, post #COVID19?
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It’s tempting to say that Lean will have a resurgence post COVID-19, as the world tips into recession.

But many funders have raised large funds at the top of the market. 10 of the largest 15 VC funds ever raised, have been since 2016.

And tech startups will be especially hot, seeing the resilience of tech in this downturn (NASDAQ is inching back towards its peak!).

So capital is available, searching for “fat” tech startups that can absorb a lot of their capital. The number of seed deals will continue to fall, as they have since 2015.

Source: State of the Venture Capital Industry in 2019, Toptal

Let’s talk about Quibi.

OK, we’ve discussed why fat startups like Quibi will be the norm going forward. Now it’s time for the punchline.

I don’t think Quibi will work. Despite all the leverage (or “fat”) it has.

It won’t go bust. But the value of the company will trend towards the value of the content it has bought / licensed. The platform itself will have limited value at best.

Let’s get the obvious first-level problems out of the way.

Quibi launched at the wrong time

At one level, this is correct. It’s also a massive understatement. The launch date of April 6, decided a year ago in true fat-startup style, ended up smack in the middle of a worldwide quarantine.

People aren’t traveling to work. They don’t need Quick Bites on their mobiles. Which is a bummer, because Quibi’s first product works only on mobile.

But this is a problem Quibi can surmount. Remember, Katzenberg and Whitman have plenty of capital. They can wait till people start traveling again.

Quibi isn’t as viral as TikTok

You’re right, it’s not. And yes, the product needs to be viral to succeed.

But it will improve. Again, with so much cash in the bank, Quibi can afford to iterate and improve the product.

In fact, Tiktok is not the point.

Quibi isn’t about user-generated content. It’s about quality, Hollywood content.

It’s like Netflix, but for mobile.

The Netflix of mobile is ____

Unfortunately for Quibi, the Netflix of mobile is… Netflix.

Or Disney+ or Amazon Prime or Hulu or HBO Max.

For one, Netflix does have some short-form content that you can watch on mobile.

And if Quibi unearths a crazy-large latent need for “quick bites”, Netflix will copy it. Without mercy. Just like Instagram cloned Snapchat and starved it of oxygen.

Remember the TiVo Problem:

The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation.

The Netflix of mobile is… Netflix. Or Disney+ or Amazon Prime or Hulu or HBO Max.
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But the more important reason Quibi will fail is…

This tweet:

What is Quibi’s Seinfeld?

Content follows a Power Law distribution. You can have a million shows, but viewership will concentrate around a few.

I couldn’t find a chart on TV shows, but here’s a chart about movie viewership from Michael Tauberg.

Movie box office collections follow a power law.

Netflix paid 6 years (!) of its content budget for Seinfeld, because Seinfeld is a “whale”. Like The Office and Friends, this is what people will subscribe to Netflix for. Not for Altered Carbon or Too Hot to Handle or whatever else.

That’s the math of the streaming video industry.

Consumers will pay for 2-3 subscriptions, and you do what you can to be one of them. You need proven hits like Seinfeld, not hit-or-miss new shows.

It’s like the SEO Red Queen Effect – if you aren’t in the first three results on Google, you don’t exist.

Quibi has some solid content. But unless it unearths a Seinfeld or Sopranos or Big Bang Theory in its first try (possible, it’s Katzenberg after all), it’s down for the count.

Well, that’s how the Quibi crumbles.

Related: Teledesic was the original fat startup. Raised two billion dollars for a satellite network… and then didn’t even launch.

As Tren Griffin writes in this short memoir, some investors received many times their original investment. Even though the company never provided service!

[1] Referencing Jeff Bezos, via Eugene Wei

[2] More in The agreement that catapulted Microsoft over IBM

Thanks to Srinivas KC, Jinesh Bagadia, Aditi Gupta, Bharat Ram, and Anupam Agarwal for reading previous drafts of this.

[UPDATE 5/31/2020]: Seems like some of my predictions are starting to come true, ahead of schedule.

How dumb are these Nigerian princes! Or are they?

jitha 1 Comment

Have you ever received an email from a Nigerian prince, going somewhat as follows?

Nigerian prince email

I’ve received a bunch of these over the years.

It’s a standard template. Someone in Nigeria or Congo or Dubai, is dying or is dead. They have several million dollars that they want you to help safekeep. They need you to make a small payment first for some ridiculous reason.

Would you fall for an email like this? Of course not. Come on, this is 2020! No one would fall for it.

But “Nigerian prince” email scams still rake in over USD 700,000 a year – and that’s from the US alone.

Well, you say, you didn’t mean no one. Of course there are some clueless people around. And 700K is not an astronomical sum.

In fact, if the scamsters could make their email even a little more plausible (a small business owner in the Mid West instead of a West African prince, for example), more people might fall for it?

And while we’re on the topic – we should also correct the spelling mistakes. Seriously, why do scamsters always make so many spelling mistakes! Even in subject lines!

Yes, these “Nigerian prince” emails could be more polished and plausible. But making them less plausible is precisely the point.

Hold that thought.

Yes, these “Nigerian prince” emails could be more polished and plausible. But making them less plausible is precisely the point.
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Marketers & Hungry Crowds

The #1 principle of Direct Marketing is – Qualify the funnel.

As Gary Halbert (“history’s greatest copywriter”) says in The Boron Letters:

One of the questions I like to ask my students is, “If you and I both owned a hamburger stand and we were in a contest to see who would sell the most hamburgers, what advantages would you most like to have on your side?”

Some people say they would like to have the advantage of having superior meat from which to make their hamburgers. Others say they want sesame seed buns. Others mention location. Someone usually wants to be able to offer the lowest prices. And so on.

After my students are finished telling what advantages they would most like to have, I say to them: “OK, I’ll give you every single advantage you asked for. I, myself, only want one advantage and, if you will give it to me, I will whip the pants off of all of you when it comes to selling burgers!”

“What advantage do you want?”, they ask.

“The only advantage I want, ” I reply, “is a STARVING CROWD!”

If you’ve found a starving customer, you don’t need much else to close the sale.
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Find rotten eggs early

One of the key lessons from High Output Management is this:

Material becomes more valuable as it moves through the production process. So, fix any problems at the lowest value stage.

To quote from the book:

All production flows have a basic characteristic: material becomes more valuable as it moves through the process. A boiled egg is more valuable than a raw one… A college graduate to whom we are ready to extend an employment offer is more valuable to us than the college student we meet on campus for the first time.

A common rule we should always try to heed is to detect and fix any problem in a production process at the lowest value stage possible.

Thus, we should find and reject the rotten egg as it’s being delivered from our supplier, rather than permitting the customer to find it. Likewise, if we can decide that we don’t want a college candidate at the time of the campus interview rather than during a plant visit, we save the cost of the trip and the time of both the candidate and the interviewers.

Let’s say you run an apparel factory. If the input cloth you received has quality defects, when would you rather find out? When the shirt is ready, or before the shirt goes into production?

Or you run a SaaS business. If your prospect is going to drop off the funnel next week, wouldn’t you rather find out today? Instead of after inviting them to an online workshop, doing a 1-1 free consulting call, and mailing them three times?

Or let’s say you have your team working on a complicated analysis. If they are making a basic assumption that’s wrong, would you like to find out once the analysis is complete? Or would you rather align at the start, and save a lot of time?

Catch errors early. If an egg is rotten, find out before you scramble it.
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That’s why it’s always a Nigerian prince.

It’s easy to send that first email to thousands of people.

The next steps are more labor-intensive. A person has to talk to the target, persuade them to wire money, and cajole them to jump through other assorted hoops.

Labor = costly.

Wouldn’t it be nice if there was a way to spend time only on the most qualified customers (i.e., the most gullible targets)?

In fact, as the original research paper from Microsoft says:

Far-fetched tales of West African riches strike most as comical. Our analysis suggests that is an advantage to the attacker, not a disadvantage. Since his attack has a low density of victims the Nigerian scammer has an over-riding need to reduce false positives. By sending an email that repels all but the most gullible the scammer gets the most promising marks to self-select, and tilts the true to false positive ratio in his favor.

That’s why phishing emails have spelling mistakes.

To self-qualify the funnel.

It’s not that the phishers struggle with English. That would be funny if it were true. Masterful confidence tricksters, but struggle to put together rudimentary sentences.

No, they speak English fine. It’s just that they don’t want people with high attention to detail to click on the link. If you notice such minutiae as spelling errors, then you’d notice other more suspicious details later and stop responding anyway.

They want only gullible prospects, with the least attention to detail.

They want to have a high percentage of such people pass through the next steps of the funnel. Share their passwords in a mindless fog. Click on executable links as an afterthought. Download Trojans in utter oblivion.

Phishing emails deliberately have spelling mistakes. So that only less-attentive people click through.
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Fascinating. So is there a lesson in all this?

Yes, three in fact.

Lesson 1 – qualify your funnel as early as you can. And if possible, create a way for your audience to self-qualify. Don’t do sales calls with every visitor who stumbles across your website and shares their email. Instead, make them do the work of qualifying themselves. Have them join a webinar or download two white papers (both have zero marginal cost to you), before you do the hard pitch.

Lesson 2: Catch errors early. If your team is working on a complex analysis, first agree on the basic assumptions and logical flow. If it’s an investor presentation for next week, agree on the key messages and storyline today.

Lesson 3: Don’t click on emails from Nigerian princes.

Digital advertising doesn’t work. And marketers don’t care.

jitha
Digital advertising doesn't work

Digital advertising is one of the biggest new industries of the Internet era. In 2018, USD 273Bn was spent on digital ads globally.

What if I told you it was all fake?

Or more accurately, what if this article told you it was all fake?

The article has several examples of real-life experiments – e.g., when eBay stopped all its ads on Google for 3 months, the drop in online sales was 0%. Yes, you read that right – zero, nada.

But how? Aren’t people clicking on those ads? How can the impact of removal be zero?

Two factors drive this surprising outcome.

  1. Do you remember the last time you searched for an app on Google? For example, I searched for “Spotify” last week. The first link was an ad, for Spotify.com. So I just clicked on that. And an ad-click counter somewhere in Google went up. This is called Selection Bias. Of the people who clicked on any given ad, you don’t know how many were looking for that item anyway.
  2. Search engine algorithms are trained to show a given ad to people who are most likely to click on it. This Algorithmic Bias magnifies the selection bias. As the algorithm gets better (and Google’s algorithm is pretty mature now), increasingly, the people who are shown an Amazon ad are the ones who were planning to go to Amazon anyway.

In fact, some skeptics believe that ads don’t work at all. That no one is convinced to change behavior based on ads. Could it be true?

Well, do you remember the last time you clicked on an ad while not looking for that exact item? Me neither. (except for that banner selling N95 masks last week, but it was sadly out of stock).

But surely, you say – if digital ads didn’t work, why are marketers still spending hundreds of millions on them?

As the article says, quoting Steve Tadelis, “marketers actually believe that their marketing works, even if it doesn’t.” Good old Cognitive dissonance.

Yes, cognitive dissonance does play a role. But I think there’s a second element too. You know the saying, “what gets measured gets managed“. Google and Facebook report clicks and impressions, not actual incremental purchases. That’s what is available, so that’s what marketers track and optimize. They don’t track incremental purchases, because there’s no way to monitor that.

Digital advertising doesn’t work. And marketers don’t care.
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In other words, what doesn’t get measured, doesn’t exist.

Related articles:

[Note: this article appeared in my newsletter, Sunday Reads #84. Read the rest of the newsletter here]

Four things Apple’s slow slide teaches us about business strategy

jitha

From a quick dipstick I did last week, I’d guess a good chunk of my readers use a Macbook, and even more use an iPhone. I think it’s fair to say: Most of us are Apple fans.

So, it’s concerning to see the company meandering over the last few years. Lackluster product launches, even more lackluster products. Even Siri seems dumb now.

 

Is Apple losing the plot?

Smart folks are really worried about Apple.

apple-slow-slide

Apple’s slow slide illustrates four key principles of business strategy:

1. The S-Curve of Company Growth: Any successful company inevitably goes through a life-cycle of stuttering beginnings, rapid growth, and then gentle maturation – an S-curve. This has been true both in the Internet era and before, as Ben Evans illustrates in The best is the last. Apple is no different. Apple may be the next Microsoft.

 

2. Limited Window of Optionality: There is a way to prolong your growth arc, though. Keep transforming your business, when your previous product is succeeding, and the wind is at your back. Jobs leveraged this limited window of optionality successfully, with the iPod, then the iPhone, and then the iPad. Larry Ellison did it at Oracle too.

But Tim Cook hasn’t been able to lead such pivots at all.

Why?

 

3. The Visionary Leader – Executor Follower Conundrum: Steve Jobs was a visionary (duh). And he built a strong team of executors around him, to implement his vision. So, guess who succeeded him? A superb executor, but short on vision. Tim Cook is great at delivering on an existing strategy, but he just hasn’t kept pace with a fast-changing world.

[The similarity with Microsoft shows here too. It’s the same reason Bill Gates chose Steve Ballmer as his successor. With similar effects.]

 

4. The Jobs-to-be-done Framework: There’s another interpretation of Tim Cook’s non-success. And it comes from Clayton Christensen’s second big theory – jobs-to-be-done. As he says, consumers buy products that complete specific jobs for them.

“People don’t buy quarter-inch drills, they buy quarter-inch holes.”

The job-to-be-done is quite clear with the iPod, the iPhone, and the iPad. But Apple is struggling to find jobs for the Apple Watch and Apple Pay.

 

So, plenty of problems for Tim Cook. But maybe, just maybe, we’re all wrong about this and a major pivot is coming.

How to break the chicken and egg problem – A Framework

jitha 1 Comment

In March last year, I published an article called How Uber solved its chicken and egg problem (and you can too!).

Multi-sided business models are a unique phenomenon – unlike standard businesses which offer a product / service to a particular type of consumer, multi-sided businesses don’t offer any product / service. Rather, they provide a platform that connects buyers and sellers.

Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.

Such businesses face a natural chicken and egg problem. For the platform to be useful, both sides have to be present. Sellers won’t come on to your platform without buyers, and buyers won’t come either, unless there’s enough choice (i.e., sellers).

For example, people buy video game consoles only if there are games they can play. But game designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?

The above article discussed a few ways in which businesses can break this deadlock. Many readers wrote in after the article, asking if I could create a framework / checklist that they could use to brainstorm ways to scale their own multi-sided businesses.

Towards that end, I recently published this presentation on SlideShare. Check it out, download it, and let me know what you think!

How to save yourself from a bad startup idea that looks good

jitha 9 Comments

Startup_Ideation

The startup bug has bitten you. You want to start a business, grow it for a few years, sell out and rest easy for the rest of your life. A great dream to have. But that’s the easy part. The hard part is building the business. And this long, arduous journey starts with a single step – having a great idea.

How do you come up with a startup idea? To start, you read this article by Paul Graham of Y-Combinator. It’s thought-provoking, even by Paul’s lofty standards. Paul says a lot about the characteristics of great ideas. But he also talks about a similar-looking but antithetical concept – the “sitcom” startup idea.

What is a sitcom startup idea? It’s one which sounds plausible, but is actually bad.

This is not just a bad idea. We have tons of those, and they are easy to identify. Even if our ownership of the idea blinds us to its infantile stupidity, our friends will warn us. They’ll tell us it’s the dumbest thing they’ve ever heard. And we can swallow our pride and move on to the next idea.

No, the sitcom startup idea is not bad in the same way. It’s an idea which sounds plausible. So plausible that when you go ask customers whether they’d use it, they don’t say no.

This is what makes it dangerous. You can read Lean Startup, dutifully ‘validate’ your idea with customers, and then build it. Only to find out that there actually is no market.

Social network for pets

Paul illustrates this with an example of a ‘social network for pets’. If you have pets, this sounds like a good idea. Sure, you can imagine posting photos of your pet parakeet on petlife.com, where others are waiting with bated breath to “like” them. Or, what’s far more insidious, you can imagine others around you loving this service.

I actually tried this during my lecture in IIM Trichy, and people loved the idea. But it’s bad on two levels:

  1. It’s erroneous to assume that if people say they like a product, they’ll use it. I might like 30 different websites, but that doesn’t mean I’ll check all of them every day. Given my limited attention span, the only social network I’ll use daily is Facebook.
  2. If you talk to 100 people and they all say they “know someone who would use this”, then you’ve found yourself a community of 100 almost-users. Or to be precise, exactly zero users.

So how do you differentiate between sitcom startup ideas, and truly promising ones? How do you know if you’re on to something huge, or just a mirage?

Mirage

The short (and hard) answer is – you try anyway. You build an MVP and check if there’s traction in the market. If there is, congratulations, it worked. If there isn’t, then you know you just had a “sitcom” idea.

But there is an easier way. I’ve come up with a few patterns to identify what is probably a bad idea, even though it sounds plausible.

Before we jump in, a caveat. I don’t know if any plausible sounding idea is actually bad. What I do know though, is that the universe of plausible ideas is much, much larger than the set of good ideas. So, an idea that is only plausible is probably bad.

Venn_diagram

Just like I know that a monkey banging away at a keyboard will not produce Romeo and Juliet (it might, but the probability is infinitesimal), if all I know about a startup idea is that it’s plausible, it’s probably bad. Sure, you get a Twitter every once in a while. A product that seems random can suddenly catch fire. But such instances are so few and far between that you can ignore them.

With that done, let’s dive in to the patterns:

1. Broad and shallow, vs. narrow and deep

One of Paul’s theses in his article is that you should solve a deep need for at least a few people. If the need you are solving is shallow, then it’s not a great startup idea. Even if it affects a broad set of customers.

It’s got to be a major problem – a mild or one-time issue won’t cut it.

You’ve got to create a product that at least a few people NEED, not one that many people WANT.

A sitcom idea of the ‘broad and shallow’ variety can follow several patterns.

A “vitamin”, not a “painkiller”

The social network for pets falls into this category. It’s a nice-to-have, like a vitamin capsule. No one needs it, like the root-canal patient who’ll pass out without a painkiller. If people just ‘want’ what you’re building but don’t ‘need’ it, tread with caution. You may be onto a bad idea that sounds good.

Instead of focusing on cool things people could use, try and solve a real problem.

Not solving a top-tier problem

But only solving a problem is not enough. It has to be important. Simply put – if the problem you’re solving is not one of your customer’s top 3 problems, it’s not important. Give up now, before it’s too late.

I once thought of building a software tool to help VCs manage deal flow. It would have a visual funnel, to tell the VC how many deals they have seen in the last 3 months, and at what stage of discussion each deal is. And they could dice it by any filter (e.g., SaaS vs. consumer, location, stage of business, etc.) to see their deal pipelines.

A great idea, I thought. The only issue – it’s not an important enough problem. Getting strong deal flow is far, far more important than tracking it. Many VCs are happy enough using Excel to track their pipelines. They’re not even trying generic funnel management systems like Salesforce. Why will they bother using one tailored for VCs?

If the problem you’re solving is not one of your customer’s top 3 problems, it’s not important.

“Solving a problem people don’t know they have”

This is a first cousin of the two patterns above. While not a “vitamin” solution per se, it’s solving a problem people don’t know they have. Which begs the question – how do you know they have this problem?

I tried doing this a couple of years ago, with a plug-and-play loyalty program for small business websites. Users would get points for coming back to the website every day, reading articles, sharing to social networks, etc.

A great idea for large, stable businesses trying to increase customer retention, maybe. But a small business finding its feet? These guys don’t even think about gamification or loyalty. They have other problems. They need to build a user base first, before trying small tricks to engineer loyalty.

I tried selling this for 6 months. It did not work. It’s hard enough convincing people to buy your product. Why do you want to add the burden of convincing them that they need it?

If you want to avoid building something no one wants, then solve known problems.

“This product solves everyone’s problems” OR the “Microsoft Office” product

I love Microsoft Office. It’s so flexible, so all-encompassing. No matter what type of problem you’re working on, you can bet that Excel and PowerPoint will be super helpful. Or think of Google – no matter your query, you can find the answer.

These are all excellent products. But aiming to solve everyone’s problems in one go can sound the death knell for startups. Why? Taking the example of my gamification system again:

  1. It’s unlikely that there’s a dire need for your product among a huge mass of people already. If you’re solving a problem for everyone, it’s probably a broad and shallow problem, not a deep one. My system was a nice-to-have, not the answer to their top 3 problems.
  2. In most cases, flexible products necessitate a learning curve among customers. Newsflash – your customers are too busy to spare any time to learn how to use yet another product. Unless you’re solving a problem as critical as the ones Office and Google solve, good luck getting adoption. It’s more sensible to focus on one type of customer, and solve their problem better than anyone else.
  3. Solving everyone’s problems at the same time requires a complex back-end. Why build that without strong market validation first? You’ll either end up building a buggy product, or worse, build a great product that no one wants. In the case of our product, the tech challenges proved intractable. Trying to integrate our system with several website technologies meant that it didn’t work well with any.

Trying to solve a problem for everyone often means you end up solving it for… no one.

“Cool product I’ve built”

You get this a lot from engineers (I’m one too). We focus on the product, because we feel that the product alone is good enough. “My cool new app allows you to share your photos with all your Whatsapp groups in one go”. Great, but what if your users don’t want that?

“Build it and they will come” doesn’t work, in this world where a million apps are fighting for people’s eyeballs. See the chart in this article to see how high the bar is. You need to be sure that you’re solving a problem, and a top-tier one. Else, you could just be a “solution searching for a problem”.

Demonstrate need first. Else, your intricate product could just be another elaborately constructed pipe dream.

2. Templatized business models

“Uber for X”

[as used in “Uber for bicycles: On-demand bicycles for your riding pleasure”, or “AirBnb for cars: Rent other people’s cars when they’re not using them”]

"Do you want a bicycle at this very moment?"

“Do you want a bicycle at this very moment?”

This template is as old as the Internet. Take what’s working in one sector, and plonk it into another. It was “Website for X” in the 90s, and “Social network for Y” in the 2000s. But it’s a dangerous stratagem. Why?

Sure, Uber has been uber-successful in the cab market. But that doesn’t mean on-demand could work for every other sector. Unless the idea has grown organically from a problem, you have to assume it’s bad. You have to assume that the founder has applied the Uber template to the first sector he could think of.

Another clue that you’re facing this situation is when founders have no real expertise in the area they’re building for. Then how do they know that the problem is real? They don’t. All they know is that the solution is real, for another sector.

“X for India”

This is an even more pervasive and notorious template. Unless the model has some kind of geographical constraint (e.g., on-demand cabs), there’s nothing stopping a successful US business from expanding to India.

Moreover, if the model involves network effects, then you’d expect something that’s grown in one place to capture share rapidly in other places too.

As Mahesh Murthy is wont to say, the Facebook of India is Facebook. The Tinder of India is Tinder, and not Woo.

There’s one more problem with this template – some models just don’t extend across geographies. On-demand bicycles may be a great idea in Scandinavia or Taiwan. But it just won’t work in hot, sultry, noisy and overcrowded Mumbai (gosh, why am I still living here?).

3. Incremental business models

This is another type of business idea that we see quite often. It often involves just a slight tweak to solutions existing in the market. Again, this can be of two types:

Cloning an existing player, but with slight improvement

Think “Uber with wi-fi”. Of course, Uber has started doing this now. But even if it didn’t, this would be a horrible idea for a startup. Wi-fi is not differentiation. It’s a cosmetic touch-up engineered solely to help you raise money from rookie investors.

It’s wrong on two levels:

  1. It assumes that the incumbent will sit idle while you bring out an improved product. If what you’re bringing to the table is only an incremental improvement (i.e., 1x, not 10x), you can bet that the incumbent will also include it in their next release, if they find out it’s a helpful add-on. Don’t assume stupidity.
  2. Often, your improvement has nothing to do with the core problem you’re solving. Wouldn’t it be silly to say, “Uber works, but people hate the fact that it doesn’t have wi-fi.”?

Cloning an existing player, but in an adjacent market

Back when Bookmyshow (a movie ticketing website in India) was only a couple of years old, a friend told me he wanted to build a “Bookmyshow for Plays”. This is a bad idea too. Bookmyshow had already solved the harder problem of getting customers. So, it was much easier for Bookmyshow to include plays on its platform, than it was for a new player to start afresh. And true enough, plays appeared on Bookmyshow a few months later.

A giveaway for this kind of sitcom idea is a statement of the form “Today’s solution is satisfactory. But mine’s much better”. For your idea to be definitively good, today’s solution cannot be satisfactory! At least for a segment of the audience. Otherwise, your idea would be like my deal flow management solution for VCs. A nice-to-have, but not nice enough to change an existing process.

What is nice enough though, to change one’s existing behavior? A 10x improvement – whether in ease, time taken, or effectiveness.

4. “No Competition”

You often hear founders say that they’re the first team to do X, and that there are no competitors. Or they may say that everyone is a competitor (which is another way of saying “no competitors”). If you hear this, run in the opposite direction as fast as you can.

Why? Why is lack of competition alarming? For two reasons:

  1. If there really is no competition, maybe the market itself is unattractive. Today, it is difficult to come across a problem that no one has seen at all. Why do you want to solve unambitious problems, when it’s just as difficult as tackling ambitious ones?
  2. The founders may not have done thorough analysis, or may be suspended in the myth that their competitive moat is bigger than it actually is. Would you want to back such founders?

Wait, so am I saying competition is actually important? Yes – many players trying to solve a problem demonstrates strong need. But to succeed, you still need to differentiate. You need to have an ‘unfair advantage’ in startup parlance. Whether industry experience, critical partnerships, etc. – you must have a secret sauce in your recipe for success.

Your competitors will not sit idle while you beat them. What’s your secret sauce?

That’s it. Those are the patterns that should raise your suspicion antennae when listening to startup ideas. Am I missing any? Let me know in the comments, send an email to [email protected], or tweet at @jithamithra.

Of course, some ideas may actually be great, even if they fit these patterns. They may end up changing the world. Only one way to find out for sure – launch an MVP, and prove me wrong.

What do you really need to start up? [Slideshare]

jitha 5 Comments

Last week, I was invited to the Indian Institute of Management, Trichy, to talk to the students about startups.

Given the hype associated with “starting up” today, with investors opening their purses wide and newspapers dedicating daily centerfolds, everyone wants in. And if I remember correctly from when I was a student (or even when I was working in strategy consulting), it can become difficult to separate fact from fiction when you’re looking in from outside. More so if your only source of information is a newspaper.

 

Therefore, I decided to speak on “The truth about startups”. Apart from being clickbait, the topic is also pertinent for a number of reasons.

  1. Startup accounts in newspapers are almost always after the fact – they are tinted with 20:20 hindsight. There’s a lot more uncertainty when you start a business. Lots of things go wrong. All of this is airbrushed away in the ‘inevitable march to victory’ accounts you find in newspapers.
  2. If you look for patterns only in companies that succeeded, then you’ll suffer from survivorship bias. Seeing that many successful founders are passionate today is not enough to conclude that it is necessary and sufficient for starting up. For all you know, the graveyard of failed businesses may be littered with passionate entrepreneurs (and it is, as you’ll see in the Slideshare presentation below).
  3. As Steve Blank says, small companies are very different from large ones. A company that has just started is very different from one that has found product-market fit, which itself is distinct from one that has scaled. You hear only of startups that have found some measure of success already. Applying patterns from such companies to your fledgling company indiscriminately will at best be a waste of time. At worst, it can cause active harm.

 

As a founder who’s in the trenches right now, I thought I must set the record straight. When you’re trying to find your feet and learning how to build a sustainable business in an uncertain world, what do you really need to set out on the path to success?

I asked the students this question at the outset – what do you need to start a company? Almost all the answers were variants of the following:

  1. Passion
  2. Vision
  3. Dedication
  4. A brilliant idea
  5. Lack of competition
  6. A sound business model
  7. Huge risk appetite
  8. Tons of money / resources

These sound quite definitive. But they aren’t.

I don’t think you need ANY of the above to start up, as I explain in the embedded Slideshare presentation. They may become important at later stages of your startup’s life, but they are definitely not needed when you’re just starting out.

And I’m not saying this just to make a point. Some of the above factors are distractions at the start, and some others may in fact insidiously drive you to inevitable failure.

 

Then what do you need? You just need two things – a decent idea, and a willingness to learn. These are necessary and sufficient for most business ideas. Check out the presentation for more.

[Tweet “You don’t need passion or vision to start up. A decent idea and willingness to learn are enough.”]

The presentation also includes links to various articles for further reading. I love diving down the rabbit hole, and I hope you do too.

I’d love your thoughts on this. If you see any gaps in logic or don’t agree with something, please comment here, write to [email protected], or tweet at @jithamithra. I’m willing to learn.

PS. Thanks a lot to Abhishek Agarwal, Aditi Gupta, Akshat Poddar, Shashank Mehta and Srinivas Chaitanya for their inputs on this.