Generating Startup Ideas
When's the best time to start a startup?
This lesson explains how to find startup ideas by studying market timing. My focus is big, venture-backable ideas, but the advice applies broadly.
There’s an important question that founders of $1B+ startups can answer: What recently changed about the world that made your startup newly scalable?
They should tell you that something changed in one of these five market forces: technology, consumer behavior, environment, regulation, or distribution channels.
The CEO of Box.com ($4.5B+) phrased it like this:
“We bet on five megatrends that would shift the power to cloud… faster internet, cheaper compute and storage, mobile, and better browsers. Even so, we underestimated the scale of each tailwind. Always bet on the megatrends.” —Aaron Levie
Changes in market forces generate new startup opportunities because they create market pull by introducing a scenario of new demand and low supply (no startups exist here yet), which makes customer acquisition cheap and easily scalable. Early adopters pay attention first then the masses follow suit if they like what they see.
When market pull truly appears, founders who leverage it first are likelier to win. I think of it like this: With 8 billion people on the planet, every decent startup idea is repeatedly fundraised for every 1-3 years until someone finally gets it to work. Whoever succeeds is whoever attempted it when market pull finally emerged.
This is why I believe that most big startups are started within three years of their ideas becoming scalable. Therefore, to say that you have bad market timing is to say that you launched before market pull existed.
Entrepreneur Bill Gross noted that Airbnb's timing was critical to beating all who came before them:
"[Airbnb was] famously passed on by many smart investors because people thought: No one’s going to rent out a space in their home to a stranger... But one of the reasons it succeeded, aside from a good business model, a good idea, great execution, is the timing. [The 2009 recession was a time] when people really needed extra money, and that maybe helped people overcome their objection to rent out their own home to a stranger."
This lesson shows you how to be the founder in those first 1-3 years—by studying market changes to find ideas of your own. While there are many ways to source ideas, I believe this approach identifies those most likely to succeed.
Examples of new market pull
Let's start with how Uber benefited from multiple market changes at once:
- Uber captured technology change: Smartphones became ubiquitous. These did not widely exist before.
- Uber captured additional technology change: GPS became sufficiently inexpensive and power-efficient to be embedded in smartphones. This capability did not exist before.
- Uber captured consumer behavioral change: Facebook, eHarmony, Match, and Airbnb made consumers increasingly comfortable with meeting and trusting Internet strangers in person. If you grew up before this behavioral change, you know a time when meeting strangers from the Internet was like taking candy from a stranger’s van, which your mother told you not to do.
This reveals a lesson about market timing: You’ll often need consumer behavior to shift in tandem with technological or regulatory changes in order for market pull to occur.
For example, just because we have the technology to remove alcohol from wine without worsening its taste, do enough consumers actually care about the benefits of alcohol reduction to purchase alcohol-free wine? They didn’t 40 years ago, but today many do, and so the market timing is right.
To intuit which changes in consumer behavior are necessary, you must inhabit the mind of your customer and build products you yourself would want. Then you survey others to ensure you're not alone.
List of examples
Many factors affect a startup's timing, but let's oversimplify them to study clear examples:
Regulation changes
Legalization of marijuana:
- Leads to the rise of CBD brands and weed delivery startups.
- This is an example of new regulation making something people already wanted legally possible.
SEC Regulation Crowdfunding:
- Leads to startup crowdfunding platforms like Republic.com (GoFundMe for investing), which became worth $1B+.
- This is an example of new regulation making something people already wanted (access to new asset classes) legally possible.
Insurance companies covering the cost of new therapies:
- Leads to the rise of telehealth startups that offer new therapies over the web.
A patent expires:
- Leads to cheaper versions of drugs, such as Hims.com offering the hair loss drug Propecia for less—while letting you skip in-person doctor visits to order online.
Consumer behavior changes
COVID causes us to work from home:
- Leads to remote work software (e.g. Zoom) and at-home workout equipment (e.g. Peloton and Tonal).
- This is an example of new consumer behavior causing one product (at-home workout equipment) to appear higher ROI than the status quo (commercial gyms).
Desire for increased security and privacy:
- Leads to secure messaging apps such as Signal and Telegram, which are alternatives to Facebook and WhatsApp.
Smoking cigarettes goes out of style:
- Leads to the rise of vaping, e.g. Juul.
- This is an example of new consumer behavior causing a product (vape pens) to appear higher ROI than the status quo (cigarettes).
Technology changes
Higher-capacity batteries:
- Better batteries made it possible to build cheaper and lighter wireless earphones (Airpods) and electric cars (Tesla).
- This is an example of new technology combined with economies of scale creating market pull: (1) the increase in the product’s utility plus (2) the decrease in the product’s cost made people newly want to buy the products.
Distribution channels
New ad channels are released:
- When Instagram and Pinterest released ad platforms, new D2C companies emerged to granularly target buyers cost-affordably and scalably.
New discovery channels are released:
- Decades ago, Google introduced SEO marketing, through which companies could newly grow cheaply and scalably without ads.
- When Facebook introduced their apps platform, multiplayer games (e.g. Farmville) piggybacked off it to grow cheaply and scalably.
The impact of changes
In all the above cases, changes in market forces may result in sudden market pull:
- Something people already wanted now becomes feasible.
- Something people already wanted now becomes affordable.
- People are greatly compelled to want something for the first time.
How to find ideas at the right time
To find startup ideas, become your customer then monitor for changes in technology, consumer behavior, environment, regulation, and distribution channels. Stay on top of the field: consume blogs, tweets, podcasts, legislation, and research. Talk to experts and consumers.
Whenever you learn of a big market force change, ask: What type of business does this newly make possible?
You’re looking for two types of opportunities:
- Products that consumers always wanted but couldn’t get until now.
- **Products that consumers could always get but only now badly want.**
When these become true, market pull may exist now or in the near future. Move fast to validate it.
Sometimes, your product experience will be significantly better than the status quo, thus creating the potential for market pull, but your implementation will be unorthodox and it will deter people. For example, Uber was initially unorthodox: we all grew up with our parents telling us not to get into cars with strangers, and we’re used to trusting licensed taxi drivers who know the streets.
But, Uber’s improvements in time-to-arrival, cost per trip, and citywide coverage made it so much better than taxis that when someone gave it a try, they didn't return to taxis. This reveals an insight about consumer preferences: if your product is far better than the status quo, consumers can eventually overcome their unjustified fear of your unorthodoxy once they’ve experienced the product.
This is why Instacart and Uber could offer free trips, free delivery, and free food in their early days: they endured an upfront loss to get you to try something strange so that the unfamiliar becomes familiar—because they know you'll then be addicted to the ROI.
If your market pull is hidden behind unorthodoxy, let people try the product and trust in the market pull.
From an investor's perspective
One of the biggest reasons investors pass on your startup is a concern that you’re too early or too late to your market. You’ve either (1) arrived before market pull exists or (2) after formidable competition has saturated scalable growth opportunities.
For most investors I co-invest with, the market matters more than everything else, with founder quality being a close second. (This is from the perspective of making a big, venture-backable company.)
So, here's the takeaway from this lesson: If your startup idea has been possible for a long time yet no one's made it work, you likely need a market change for the idea to become scalable.
In contrast, naive founders tend to think that the failed founders before them were less talented or lacked insights they have. This is unlikely. Instead, those founders were probably too early to their market. Consider how PayPal, eBay, and Instacart were obvious ideas that had been tried many times before—but the technical, behavioral, and financial conditions weren’t previously supportive. (Boo.com, Pets.com, Webvan.com, and Kozmo.com died before them.)
If investors do believe that your market timing is right, often their next concern will be whether your go-to-market strategy is viable. Meaning, do they believe you can cost-effectively acquire customers? That’s what the next lesson covers: how to scale customer acquisition via product-led acquisition.