[Note: I shared this mental model with my email subscribers on Nov 20, 2016. If you want to receive a new mental model every week, join the club.]
What it is:
We use maps, principles, mental models, learnings from experience, etc. to help us navigate the world around us. But it’s important to remind ourselves – the map is not the territory.
The map doesn’t include every feature of the territory. Even a very detailed map of London won’t include every thin street.
The territory is different: Sounds banal, but a map of London won’t help at all, if you’re in Mumbai.
The territory may have changed. An 1850 map of London won’t help you in 2016 London.
This sounds trite, but we often forget this, as we see in the following examples.
Examples in business:
Just because there’s a formula for something doesn’t mean the formula is perfect. The Black-Scholes option pricing equation bankrupted Scholes’ hedge fund. And, as Taleb says, the misplaced concreteness of Value-at-Risk has caused a lot of financial crashes.
When you hear someone say, “This is how we did it in my previous company.”, tread carefully.
Rules to follow:
Start from first principles. Always begin with, “What do we know to be absolutely true?”
Beware of false rigor. Just because something is described concretely doesn’t mean it is concrete.
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[Note: I shared this mental model with my email subscribers on Oct 30, 2016. If you want to receive a new mental model every week, join the club.]
In Lewis Carroll’s Through the Looking Glass, the Red Queen tells Alice:
Here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast!
What it is:
The Red Queen mental model comes from biological evolution. Trees in a forest grow taller and taller, to better capture sunlight. Soon, all the trees have expended enormous energy to get much taller. Yet, they get the same amount of sunlight as before.
This evolutionary arms race happens among animals too. Prey evolve to better ward off predators (e.g., rabbits running faster). But predators, in turn, evolve to better capture prey (e.g., foxes run faster too).
Everyone runs much faster, to stay in the same place.
Examples in business:
A business differentiated only on price will likely never make money. If what you’re selling is a commodity, then someone will always come along to offer it at a lower price. And good luck if someone = Amazon. Your margin is Jeff Bezos’ opportunity.
Buffett also highlights the futility of price reduction efforts in textiles (a commodity). Once you install new tech to reduce costs, so will your competitors. Soon, everyone is making less money than before.
And just incremental differentiation won’t do. So your new cab service is the only one with wifi. Well, guess what? Uber will have it in 24 hours!
Rules to protect yourself:
Don’t assume your competitors are stupid. They’re as interested in survival and growth as you are. And yes, they are as smart as you.
If you’re launching a business in a crowded market, you can’t be differentiated only incrementally. Or worse, only on price. Remember: 10x, not 10% (and cheaper too).Like Uber.
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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.
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.
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.”
[Note: I shared this mental model with my email subscribers on Oct 23, 2016. If you want to receive a new mental model every week, join the club.]
Who do you think will win the war between Google and Apple?
That was a trick question. There really doesn’t need to be a war between the two companies.
Apple makes money when people buy its products, while Google makes money when people use its services. Apple is a vertical company, while Google is a horizontal player.
But don’t feel bad for missing the trick. Google missed it too, when they framed the fight as Google vs. iPhone. When it was really Samsung vs. iPhone.
Why did they make this mistake? Why did they, for example, release turn-by-turn navigation on Maps only for Android, and give Apple a reason to launch its own Maps?
Didn’t think from first principles
As Ben Thompson explains in Google and the Limits of Strategy, they got too caught up in the Android-iPhone us-them framing, without realizing that they’re fundamentally different companies, with no need to compete!
Mike McCue (CEO, Flipboard) highlights the importance of such first-principles thinking from his own experience, in The Most Powerful Lesson in Business.
When making an important decision, examine your beliefs first. Start with a simple question: “What do we know to be absolutely true?”
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[Aside: First-principles thinking is useful when raising capital for your startup too, as I mention in Fundraising Mistake #7: Describing your startup as “Uber of X”]
[Note: I shared this mental model with my email subscribers on Oct 23, 2016. If you want to receive a new mental model every week, join the club.]
What it is:
It’s a shortcut that our minds take, when evaluating the consequences of a decision. We ascribe more importance to the first examples that come to mind. But here’s the thing – they’re not necessarily more important or probable. They’re just easier to recall / visualize.
Examples in business:
What you see is all there is – When we get into a strategic business partnership, we get complacent, thinking “we’ve made it”. But we haven’t. It’s just that success is easy to visualize, but the thousand ways it can fail are not.
Attribute substitution – when we hear a hard question, we substitute it with a simple one. “How happy are you?” becomes “How much money do you have?”. “Will this strategy work?” becomes “Do I remember an instance of this working?” Never mind that you’ve only heard of instances where it worked (if it didn’t work, you probably wouldn’t have even heard about it).
Rules to protect yourself:
Remind yourself that just because you can recall or visualize something easily, it doesn’t become more probable or valuable.
Use checklists for decisions that are influenced by a number of factors. [Note: checklists are very useful when evaluating startups at OperatorVC. It’s surprisingly easy to get swayed by a good looking product].
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[A version of this article first appeared in The Quint.]
As a seed-stage investor at OperatorVC, I see at least 50 startups a month that are looking to raise a seed round. Most pitches aren’t perfect. That’s usually OK – a founder’s core competency should be building, not pitching.
But one of the most egregious mistakes is calling yourself the “Uber of X”, or the “Airbnb of Y”.
The moment you say this, the pitch ceases to remain credible.
This is such a common refrain – and such a rookie mistake – that I can’t help but point it out.
Startups ain’t Star Trek, but I feel Picard’s pain.
I think the “X of Y” epidemic started with Y Combinator’s application process. The How to Apply page mentions that YC likes hearing “X of Y”. It helps them place the startup into the pantheon of successful companies they’ve seen.
It makes sense for YC. When they have to scour thousands of startups in a short time to select a few, a metaphor helps. “Hi, I’m the Uber of bicycles.” Enough, let’s move on.
But most fundraising pitches are not YC applications or Demo Days. Yet, Paul Graham’s words are gospel. So everyone and their next-door founder has adopted this with great gusto.
Even in situations where it doesn’t make sense.
And it’s gotten to a point where it’s almost ludicrous! I’ve heard a startup describe itself as “the BikeBob of X”. Have you heard of BikeBob? Neither have I! [Note: I’ve disguised the real name of “BikeBob”, but trust me, you haven’t heard of it.]
Let’s be clear – this is not a “done thing”. It’s not a “best practice”. It’s a mistake, in most pitching situations. Even if it’s Uber you’re comparing yourself to, and not BikeBob or MotorcycleMary.
Before digging into why it’s a mistake, there’s an even more basic question. Why do we do it? Fierce individualists that we are, why do we willingly attach our identities to something else?
Why do we do it?
Three reasons:
Helps explain the product. This is why it’s recommended for YC Demo Day.
Shows a pattern. We all know that VCs are in the pattern recognition business. This just makes it easy for them to realize that you’re the next Uber. They better chase you with their money!
An attractive narrative. Starting up is hard. It’s difficult to justify to your family – and yourself – why you’re abandoning a stable ship. In such a scenario, who wouldn’t like a little ego boost?
Saying you’re Uber of X is awesome. Wouldn’t you love to equate your startup to a unicorn?
But the moment I hear it in a startup pitch, it’s hard not to cringe. Why?
Why is it a mistake?
1. Gives the impression that you’re not solving a real problem.
It sounds like you just read about a successful startup’s business model, and applied it to the first sector you could think of.
“AirBnb for cars: rent other people’s cars when they aren’t using them.”
It’s like you went to the neighborhood workshop and bought yourself a hammer. Now everything looks like a nail!
Unless an idea has formed organically from a real problem, it’s probably a bad startup idea.
[Side note: this is just one characteristic of a startup idea that sounds good, but is probably bad. Click here for a full list of such characteristics.]
“Do you want a bicycle at this very moment?” “Not really, but your speakers look awesome!”
Sometimes, it’s a real problem all right. But the solution doesn’t make sense.
An “Uber of intercity B2B logistics” is OK from a problem perspective. Manufacturing companies do need intercity logistics.
But do they need it on-demand? No! A huge majority of customers transport loads often, on predictable timelines. They’d prefer negotiating longer-term contracts.
I once thought of applying the Airbnb model to books.
Once I finish a book, it’s lying on my bookshelf. Wouldn’t it make sense to lend it out to others who may want to read it?
The problem is real – I need to buy a book to read it. But is this the best solution at scale? No. Not in a world where book prices are falling, e-retailers offer one-day delivery, and you can download a Kindle book in an instant.
Do I know the problem exists? In some cases, yes. In most cases, no. All I know is that the solution has worked. In another, unrelated sector.
2. It can constrain your imagination.
The moment you start calling yourself “Uber of X”, you constrain your thinking. You fool yourself into believing you have a foolproof playbook. When in fact there are important nuances and differences that are critical to consider.
When Taxi for Sure started, one initial focus area was inter-city cabs. Do you think they’d have discovered the lucrative on-demand taxi market if they called themselves the “Redbus of taxis”?
Oyo Rooms, a successful startup in its own right, could have called itself “Airbnb of hotels”. But would that have worked? Would the founder have made the same decisions? It’s possible. But not probable.
3. It’s another stake in the ground you must defend.
VCs are in the business of pattern recognition. They’ve internalized the patterns of successful startups to a level you never will.
They’ll point out nuances of those playbooks that don’t apply in your case.
I once saw a startup that was building the “Oyo of manufacturing”. Just like Oyo helps hotels use their idle capacity, this founder would help manufacturers deploy theirs. Only two tiny chinks in his plan:
Hotels have average capacity utilizations of around 60%. Manufacturers have much higher utilizations. And moreover, they don’t want to be at 100% – flexibility is important. If a plant has 80% utilization, there’s no idle capacity.
Unlike hotels, production is stable. A plant owner doesn’t want one-off users. He’d prefer someone who promises orders for at least 6 months.
Pattern recognition has a flipside too. An average VC sees 500 pitches every year, to select 3-4. So, they’re far more well-versed in the patterns of bad startups than good ones. Be ready for sweeping statements!
VCs are far better at identifying bad startups than good ones.
Fundraising 101. Explain the problem you’re solving. Explain why it’s an important problem to solve. Then show your traction.
Or flip the order, if your traction is more compelling than your problem description.
These are the two most important things, for your investors to make money. They’ll be listening hard.
Not only does this avoid the pitfalls above, it also serves your original reasons better:
1. It’s much easier to explain.
The problem is now self-evident, and there’s a clear line-of-sight from problem to solution.
2. VCs would prefer identifying the patterns themselves.
Let’s say you’re trying to solve a particularly hard logical puzzle. Would you prefer it if your friend told you the answer, or would you rather figure it out yourself?
So it is with investors as well (at least with me). It’s my job to predict the future, and I’ll feel more fulfilled if I detect the pattern myself.
This may not be flamboyant. But it’ll be a better ego boost when a VC tells you that you’re the Uber of X!
TL:DR
Calling your startup “X of Y” while pitching to investors is a mistake.
It sounds like you’re replicating an existing model, rather than making an original attempt to solve a real problem.
It can also constrain your thinking.
Instead, simply state the problem you’re solving and how you’re solving it.
Leave the pattern-recognition to the investors.
PS. A far more insidious version of the “X of Y” template is “X of India”. I’ve written about it in this article.
PPS. I’m calling this “fundraising mistake #7” because (a) there are several other mistakes; and (b) I want to goad myself to put the rest of them down. So watch this space.
Successful entrepreneurs, investors and strategy experts all extol the virtues of focus. I have as well, as a strategy consultant, then a founder, a writer, and now as a seed stage investor at OperatorVC.
“If you focus on a small segment, you can own it, dominate it.”
So the conventional wisdom goes.
But there are times when focus can constrain a startup from achieving its potential. When you become a big fish in a small pond, while there are gloriously large oceans just around the corner.
How do you know which is which? How do you know when to focus, and when to extend?
This came up in a conversation with Ankesh Kothari, a fellow entrepreneur and seed investor. He highlighted how a lot of startups focus too narrowly on a small market, and never expand. And we often see the opposite at OperatorVC. Startups trying to solve problems across a broad swathe of consumers from the outset. “Microsoft Office products that solve everyone’s problems”, as I call them here.
Here’s what’s interesting: neither of these is always the right answer.
Sometimes, you have to focus on a specific consumer segment. Make sure you solve a need deeply. At other times, you need to expand your horizons.
If you focus too acutely, you’ll never become a $100 million company.
This is not intuitive. You can’t be deep in the weeds one moment, and flying at 20,000 feet the next.
Great founders can alternate between these two opposite behaviors well. And legendary founders plan for this in advance.
Before Tesla started, Musk anticipated when he would focus. And when he would extend lower in the price pyramid. And he wrote it all in a badass blog post, for all the world to see.
[Tweet “If you focus too acutely, you’ll never become a $100 million company.”]
So how can you be more like Elon Musk?
At its very basic, it’s three simple steps:
Start with extreme focus. Focus on a narrow segment. Serve that segment’s needs so completely that you build a monopoly in it. Focus on a city, community, or neighborhood, and then OWN it
Then, expand into an adjacent segment
Repeat steps 1 and 2.
Several great startup successes have done exactly this:
Facebook: Started with a student listing, just for Harvard. Once Zuckerberg found product-market fit there, he then expanded to other universities. And then the rest of the world.
Uber: Started as a premium limo service. Only for select customers, only in San Francisco. Today, there’s a good chance you’re reading this sitting in an Uber.
In the 70s, two Harvard geeks built a simple Basic interpreter for the Altair, a decidedly non-popular microcomputer. How would that ever grow big? It did. You might have heard of Microsoft.
Now, I know what you’re saying. Hindsight is 20:20.
Is this just one of those clichés that you retrofit to success stories? Or is there actually a lesson here for people just starting out?
Is it even possible to be more like Elon Musk?
The Chasm model of product adoption is a great framework to know when to focus, and when to extend.
At the trivial level, we all know this. Tech enthusiasts and early adopters will use your product first. The mass market (the Early Majority or “Pragmatists”) will gradually start using it later.
But the Chasm Model offers two new insights:
There’s a “chasm” between the early adopters and the mass market (the early majority). It’s very hard to make that leap, and many startups die trying.
Unlike the early adopters, the early majority aren’t interested in your tech. They are interested in its application to their most important needs.
And therein lies the way.
When to focus
Focus when you’re crossing the chasm.
Focus on a single narrow niche within the mass market. Understand that niche and its most important needs. Create an application of your technology tailored to that segment’s needs. Find product-market fit, and cement your place there. Own that niche.
Let’s take an example we’ve seen at OperatorVC. Say you’re building an AI based system to help people recover from illnesses. Don’t start coding algorithms for all the million diseases that are possible. Don’t even start with the 100 most prevalent diseases. Start with one disease. Just ONE.
When to extend
Extend once you own that first segment.
Select the next niche(s) in the mass market that you want to own. Again, design applications of your technology for those segments.
And REPEAT.
This is exactly what Tesla is doing now, working its way down the price segments.
Once the healthcare bot is perfect for that one disease, it’ll be much easier to expand to the next disease. And the next hundred.
[Tweet “Be like Elon Musk. Focus first. And then extend to own the world.”]
So, when you’re starting off, make sure you focus on a segment you can really own. But also be ready to extend later, so you can own the market.
