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How to start the next big thing

In his book zero to one, Peter Thiel delivers a blueprint of how to build a successful company. Although his book was published several years ago, it’s still relevant today. Let’s have a look at the most important takeaways.

The right area and market to start a business

Peter Thiel is a contrarian, he opposes popular opinions and therefore likes to ask questions like “What important truth do very few people agree with you on?” during job interviews. His personal answer to this question is that “most people think the future of the world will be defined by globalization, but the truth is that technology matters more.”

In order to choose the right area for your business you should first of all think for yourself and develop a clear image about the future. Then you should ask yourself: “What valuable company is nobody building?” There are underlying secrets behind this question that tackles secrets about nature that we have not yet discovered and secrets about people that we don’t want to tell.

Thiel delivers an example for a promising business: Nutrition. It’s important for everybody on earth but top scientists seem to work in other fields and most of the big studies were done 30 to 40 years ago. There might be an underlying secret behind this area and by uncovering this secret you could build a great business.

It’s important to note that the area where you want to do business should be something that you’re good at but also something that will be relevant in the future. Once you identified your business area, it’s time to tackle a small market where you can gain a large market share fast.

You should aim for the last mover advantage and enter the market last in order to develop a strong, monopoly position for your business. Only with the avoidance of competition will you be able to build a sustainable long term business that generates profits.

A monopoly is usually created through one or several of the following areas: 

  • Proprietary technology
  • Network effects
  • Economies of scale
  • Branding
  • Distribution channel(s)

While the proprietary technology is the most important point to focus on. Your underlying technology should be at least 10x better than the closest substitute.

Finding the right co-founder(s)

Thiel describes the choice of your co-founder(s) as important as getting married. Once you decide to work together (“getting married”) you are basically bond together for lifetime (the lifetime of your company).

A good co-founding team offers strong technical abilities to develop proprietary technology, complementary skill sets and should have a history together before they start a company. From my personal experience the last point especially is very important (which I got wrong at my first startup Gymhopper) because only then can you decide whether you also work well together and share the same values to make it work. 

What a successful company structure and incentives look like

Your company will basically be structured in three different parts:

  • Ownership
  • Possession
  • Control

The ownership focuses on the legal owners of the business, meaning the shareholders. Usually this is a mix between founders, employees and investors. The possession focuses on the operations, the people operating the business and executing the plan. These are usually founders, managers and employees. The last part control describes the board of directors which consists of investors and founders.

A few additional remarks here: Your board should be small and fast and therefore not be bigger than 3 people. Usually it’s a smart idea to have 2 founders sitting on the board and one representative of the investor’s side.

On the employee, founder and manager level it’s important to make sure that everyone who is involved with your company is involved full-time. Usually part-time doesn’t really work out. It’s also important to realize that everybody who does not own stock options or draws a regular salary from your company is fundamentally misaligned. Because these people are biased to the short-term value instead of long-term value creation. That’s also the reason why startup consultants rarely work out.

One important topic is also the CEO’s and founder’s salary. Peter Thiel has strong data that supports that a company does better the less it pays its CEO. That way the executive focuses on long-term value creation and increases the value of the company, instead of defending the status quo.

This alignment is also important for employees. While you are usually not able to pay market salaries (and also shouldn’t due to the points just mentioned before) you should definitely hand out share options to your employees in order to incentivize them to create long-term value. Don’t waste time on people who don’t have a long term future with your company.

Sales is constantly underrated

Sales is constantly underrated by companies. Most businesses are not able to make one distribution channel work and go bankrupt after desperately trying. If you can make one channel work well, you have a solid business. Additionally, superior distribution can create a monopoly by itself.

There are two important metrics you should focus on in sales: The total net profit that you earn on average over the course of your relationship with your customer, called customer lifetime value CLV. The second is the amount you spend on acquiring a new customer, called customer acquisition costs CAC. They should be at a ratio of 3:1 or higher.

Also think very hard about how you distribute and price your product. For expensive products (10k + USD) it makes sense to set up a sales force and hire sales people. For products that cost around 100 USD, hiring sales people would never pay off, so you usually go with traditional advertising. In between, usually for products priced at around 1k USD, there is a deadzone because these products are too expensive to just sell through traditional advertising but don’t pay enough to set up your own sales reps. Avoid this zone at all costs.

Additionally, something Swiss companies don’t like to do too much, selling your company on the media is a necessary part of selling to everyone else. Even if you don’t run your own salesforce and have a viral growth, media coverage will help you attract the right employees and investors for your company. So pay attention to this area and have a clear PR strategy.

The 7 questions every company must answer

Last but not least, Peter Thiel delivers seven questions that every business must answer. This can also be seen as an idea or investment evaluation tool – if people involved in that particular business have good and compelling answers to the questions at hand, they might be up to something. Here are the questions:

  1. Can you create breakthrough technology instead of incremental improvements?
  2. Is now the right time to start your particular business? (and why is now the right time?)
  3. Are you starting with a big share of a small market? (important to build a monopoly business)
  4. Do you have the right team?
  5. Do you have a way to deliver your product? (Distribution & sales focus)
  6. Will your market position be defensible 10 and 20 years into the future?
  7. Have you identified a unique opportunity that others don’t see?

With these key takeaways and questions you can find and evaluate your next big startup business. It all starts with the question: “What will the world look like in 10 or 20 years from now and how will your business fit in?”. Good luck!

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founder idea problem solution startup

How to evaluate your startup idea

You might have several ideas to start a new company but are not sure which idea is the right one or has the biggest potential. The recently launched startup school by Y Combinator addresses this issue with an outstanding podcast episode. Here are the most important key take-aways.

A startup is focused on growth

Before you actually start a company it’s important to understand the playground you choose. A startup is designed to grow really quickly. Fast growth is everything. Profitability comes second. While it’s totally fine to also launch a company that is not growing quickly and considered as a “normal” enterprise or SME, it’s important to understand the implications if you launch a startup.

If you want to build a rapidly growing company your startup idea is basically a hypothesis – why your company can grow quickly. So it’s important to also treat it as such: test and learn as much as possible about it.

The basic structure of a startup idea

A startup idea basically consists of three key parts. The problem, the solution and the insights.

The problem

The problem you solve basically sets the initial conditions. It’s crucial to find problems people actually care about. There are several characteristics that make a good problem:

  • It’s popular, meaning millions of people face it.
  • It’s growing – usually characterized by a growing market of 20+%.
  • It’s an urgent problem – people want an instant solution for this.
  • It’s expensive to solve – and therefore a good basis for your business.
  • It’s mandatory – e.g. through new laws or regulations and need to be solved.
  • It’s  frequent – meaning it needs to be solved multiple times (per day ideally).

If your startup is not taking off, it’s most likely due to the absence of these points mentioned above. While you don’t need to have all the characteristics of a good problem in your startup, you should have at least a few of them, like 2-3.

The solution

As already mentioned above, it’s crucial to start with a problem people have and care about and not with the solution. There are many great technologies and solutions out there that nobody cares about because they don’t solve a good problem. Hence, you will not be able to create a fast-growing company around this solution.

Once you’ve found a good problem, test things out, learn by trial and error and validate or falsify your hypotheses to move towards a good solution. Here it’s important to prove that you can actually build the things you sell to potential clients and investors – a track record of your team certainly helps, but mainly proven execution and delivering on your promises is the best you can do.

Insights

In the third and last part of your startup idea you explain why your solution is going to work. This basically describes your unfair advantage that separates you from other people or companies trying to do the same thing. Your unfair advantage needs to be related to growth, otherwise it won’t be an attractive explanation to potential investors. It’s also crucial that you have one or several unfair advantages; otherwise you most likely won’t succeed.

Here are 5 types of unfair advantages a startup can have:

  • Founder advantage: Only applies if you are a super expert on a specific topic e.g. you have done lots of research in a very specific deep tech area, hold a PhD and several patents. This usually applies to max. 10% of all founders.
  • Market advantage: Meaning you operate in a market that is growing 20% or more year over year. This alone is the weakest advantage you can have but still a good position to be in.
  • Product advantage: Your product is 10x better than the competition, e.g. faster, cheaper, etc. and people will notice this immediately.
  • Acquisition advantage: You successfully set up user acquisition channels that don’t cost you any money e.g. viral loops or word of mouth. Any paid channel does not count as an advantage because as soon as you’re successful, competition will enter the market and prices will increase, so this paid acquisition is not a sustainable advantage.
  • Monopoly advantage: Peter Thiel probably describes this best in his book Zero to One: your company basically becomes stronger the more you grow. This is mainly a result of network effects and marketplaces where the winner takes all.

These 3 core components of a startup idea should give you a good overview of what to focus on in the early days when thinking about your next venture. Think the ideas through with the problem in mind, validate it with potential users and see where you have an unfair advantage and you might be able to build a successful company.