29 September 2013
Some tech startups that are ridiculously wealthy seem superficial; they reduce tedium and nuisance, not ailment and misfortune. They are solutions to the problems we didn’t even notice we had, not curing pains but scratching itches. They initially sound like bad business ideas. They make you wonder why someone so smart would work on something so trivial. Finding documents online instantly, quickly getting someone’s relationship status, and syncing files between your computers, are now critical to us but were initially mere conveniences. I’ve come to believe that to succeed extraordinarily with a purely software company in the same fashion, you should prefer thoroughly solving a popular, but minor inconvenience to making any headway on a more major problem.
I don’t think this is necessarily the best framework for founding a business, but it’s produced a few good successes and will probably continue to. These businesses rely on ads or being very inexpensive, so they need to have a ton of users. Thereby a model for their success comes down to a few things:
Television shows that even if the ads have nothing to do with the content, the awareness targeted towards a blurry demographic is worth millions. With software, targeting is much more powerful, and the ads can be tailored particularly to the software’s use case.
Now, when only number of users matters, it’s clear that to succeed extraordinarily you should at least initially avoid competition at all costs. A high sticker price inevitably attracts competition. Therefore it’s the relative insignificance but massive market size of the problems these companies solve which enables a clear monopoly. High sticker prices and significant problems attract and enable competition by selecting for pickier customers.
When what you’re doing matters, the stakes are high enough that competition can capitalize on the slightest differences. Therefore solving a problem people care about is counterproductive because it allows for more competition. When you’re merely a convenience, so long as you’re free or very cheap, people won’t even bother taking the time to look for alternatives.
Being able to legitimately offer something for little to nothing is quite an absurd notion. You may imagine that if this makes sense it’s because all business problems disappear when material costs disappear, and I’d say that’s at least partially correct. It sounds like a terrible business plan, but at the very large scale and low cost of acquisition permitted by software and the internet material costs are negligible and business just finds a way. Thanks to the advertising model, having a ton of people use your product frequently can guarantee success. Only user numbers matter because any money you do make is profit, and the only barrier to entry is the switching cost of your habits and pushing a few buttons.
This way tech companies don’t cost much to start (so long as you pick a nuisance no one is making billions from yet), and they actually become rather critical and make plenty of money by the time they’re mature. By the time any of this is obvious for a particular use case it’s already too late to compete.
People form habits with frequent use that are uncomfortable to break, so switching costs will increase automatically. A commonly cited quality multiplier required to surpass switching costs from habit is 10x. If there are network effects involved (and there usually are with anything involving communication over a non-standard protocol), that cost is an order of magnitude higher. If you need to be 10x better to get users, then your best shot is being 10x better at something people don’t think matters much.
Initially, although search wasn’t very important because of portals, switching to Google was a no-brainer. It was so much better than the status quo when you did want to search. They were the first ones who cared enough to work very hard on the inconvenient proliferation of web documents. They probably didn’t expect everyone in the world to use them, but they tried their best to make customer adoption easy. Their homepage was nothing more than a textbox and 2 buttons. Now that they’ve managed to make a business of what they do, poured that money into R&D, and are the origin of most internet traffic they are both critical to our livelihood and very difficult to be 10x better than.
The typical advice for startups is to make something people want, and to test that high demand with a minimum viable product. This is good advice that will make it harder to fail, but if you’re making software I argue it also makes it harder to succeed extraordinarily. Important problems with genuine high demand make room for competition, and being extraordinarily successful requires avoiding competition at all cost.
I still think solving big problems is something to aspire to, in a humanitarian sense, but strategically this approach is superior. Even if you want to solve big problems eventually, it’ll be much easier when you’re already rich and everyone knows about you.
This also explains the youth of these companies’ founders. Mature adults don’t spend their time mitigating minor inconveniences. Real problems are heavy burdens; solving them is a huge responsibility, and to a naive youngster without hardship, commitments, or dependents, mitigating inconvenience is more fun than anything else they could do with their time. It is this mark of maturity they do not possess, sympathy for true pain and suffering, that leaves them with only itches, and a very powerful new set of tools with which to scratch them.
This inconvenience filter may also apply well to the things that are possible to do well with software. Computers don’t find the same tasks easy that we do. We find long arithmetic difficult & tedious, though it is very easy for computers. At the same time understanding speech is an automatic process for us, but speech recognition software needs to run on enormous computing clusters to achieve even 70% accuracy. What simple filter would you apply to a set of tasks to determine which could be made automatic, if you didn’t know how to program? The tedious-ness filter was the best I could come up with.