What do startup ideas have to do with the economic downturn?
And how it will end
Today’s post is a fever dream from a jam band concert. I went to see Trey Anastasio Band on Saturday in Vail. As good as the band was, I found myself losing the thread of the music because I was composing this post in my head.
There, under the psychedelic lights and thumping bass, I went through the following series of thoughts: startup ideas are more important than we want them to be, and they’re particularly hard to come by right now. Today’s scarcity of good startup ideas is related to the economic downturn, and finally, the way out of the downturn will require us to get to a place where startup ideas are easier. This is a lot to take in, so from here, we start unpacking.
Why startup ideas are more important than we think
Recently in a very active Slack channel for founders, someone asked “At what point do you ask potential investors to sign an NDA?” and of course he got crushed. The “never” responses rolled over him like an avalanche. Some kinder people carefully explained that NDAs are an experience litmus test. VCs never sign them, and when you ask for one, they know you don’t know wtf you’re doing.
Then people went on to tout the common wisdom that it’s not the idea, it’s the execution. “Ideas are easy.”
So if this is true, if ideas are easy, then the corollary should be true. Namely: you don’t need a one in a million idea to make a great startup. The people that believe this parrot anecdotes like how YouTube started as a dating site, or how Pinterest started as an ecommerce sale tracking site.
But I disagree completely with this. I think the best entrepreneurs have instincts that are sharpened with intelligence, intuition, and experience to the point that they can predict how markets will react to their ideas fairly accurately.
In 25 years, I haven’t seen any evidence of a formula you can follow that will produce product market fit. If there was a formula that worked, wouldn’t we see a change in the reasons for startup failure after processes like lean startup and customer driven development became popularized? This diagram from a 2021 CBInsights study suggests that, nope, startups still mostly fail because of product market fit.
Ideas are super super important and difficult. Great ideas are the ones that anticipate market need with just the right product.
Back to signing NDAs. Yes startup success ultimately relies upon execution, but if you could get your hands on a fantastic idea, it sure would give you an advantage. I have no doubt that top tier VCs nudge certain of their best teams in directions that they come across from teams they’d rather not invest in. Remember from my first post, the startup ecosystem is a hierarchy. I think the odds will be in your favor if you make yourself an all star team member on the receiving end of advice from VCs (who are privy to lots and lots of non-NDA startup ideas), than to keep your perfect idea out of the startup industrial complex.
Why startup ideas are hard right now
I realize this is not a particularly inviting message. People prefer optimism. Wouldn’t you rather read that anyone can be an entrepreneur, and you’ve probably got a dozen unicorn company ideas that you can list in a half hour of brain storming?
But no, I’m going to take this post to an even darker, more pessimistic place. There are times in history where there are more billion dollar ideas available for the taking than other times, and so the probability that your idea is one of the billion dollar ones is greater.
This is not one of those times.
Business ideas abound when we’re at the beginning of a massive technology adoption curve. Don’t take my word for it. Here’s Benedict Evans saying it in three minutes with illustrations of plants. Recent examples of technology adoption s-curves are the first PCs in the 1970s, the beginning of the internet in the 90s, the beginning of SaaS with cloud computing, Heroku, and Rails in the mid aughts, and the beginning of the mobile app universe in the 2010s.
Evans’s video is from 2017, and he said we were still in the middle of the mobile app s-curve. We’re definitely at the end of it now.
Is being at the end of an s-curve the reason for the downturn?
Not entirely. In a macroeconomic environment that includes the war in Ukraine, the effects of stimulus level fed rates, and the stock market crash, only the stock market crash—particularly in the tech sector—can be tied to the s-curve idea.
Nathan Baschez wrote a phenomenal, must read, piece describing how each of these macroeconomic elements is causing shit to hit the fan, and in the end section on why tech was hit harder than other industries, he refers to “low quality copy cats”. Essentially, he said that the initial rise of tech stocks happened when people saw trading them as a way to make money. Other people copied what they were doing with their own trades and with other companies, but eventually some of the copies of the high flyers were not as good as the ones that got the market pumping in the first place. In my mind, another way of saying this is that the low quality copy cats are what happens at the end of an s-curve.
There were a few s-curve on-ramps that looked really promising a few years ago, and again I’m with Benedict Evans here. Machine learning (with self driving cars as a subset of that), augmented reality, and blockchain/crypto all seemed ready to take off. Crypto did take off, but as a speculation bubble, not as a wellspring of useful products that improve people’s daily lives. The other ones didn’t. We’re at the end of the mobile technology adoption s-curve, and the next s-curve still hasn’t shown itself.
How the downturn ends
I think it will end with the beginning of a new s-curve adoption cycle, and I don’t think we know what that will be yet. Here’s a wild guess because I like to live dangerously: we are entering a regulatory moment where there is political will, especially in Europe, to force giant internet companies to operate differently. The political forces might even strengthen as the downturn worsens.
A sea change in regulation could open up new markets and make new companies possible in a way that feels similar to the s-curve that happened with the beginning of the SaaS markets of the mid aughts.
Or maybe one of the other tech advances hits—machine learning, or CRISPR, or even web3 gets to a level of maturity where market adoption can accelerate.
Until we discover that next s-curve, business ideas will be super difficult to come by. They’ll require deep insight into markets, and massive capital. All the easy-to-build, easy-to-sell stuff has already been done.
But I want to be an entrepreneur now!
If you’re starting a business today, you need a great idea. So follow these three steps
Learn to recognize existing market demand.
Come up with an idea that can capture that demand, and
Find a way into that market with a product that is worth the risk of trying something new or the cost of switching.
That’s it! That’s the entire game right there.
Good luck. It’s a horror show out there.