I love thinking of new ideas and evaluating new markets. Here are some frameworks I use to help founders think through their ideas.
Activities like buying a house, getting a job, estate planning, or booking travel are difficult to do sometimes, but they are not a regular activity for the average person. These activities usually end up costing money and time due to low frequency of use.
There is often someone in the middle who holds the key to the information the customer wants. Rich Barton, founder of Zillow, Expedia, and Glassdoor frames this thesis as “*Power to the People*.” Essentially, having users generate information to create data loops that then help aggregate consumer demand quickly and match it with suppliers.
Interesting companies are well suited to be built here where there is information asymmetry or information gatekeepers that can be dissolved with user-generated content.
If you're in this quadrant as a company, there's a familiar playbook on how to execute it. I highly recommend everyone read it and I wish you would write more analysis!
I used to believe that this quadrant had a high cost of customer acquisition (CAC) and a lifetime value (LTV), however, using Barton's book, one can decrease the CAC while keeping the LTV relatively high. That's the beauty of this quadrant, which I didn't understand for a long time. When you give power to people, magic tends to happen.
Many startup gospels tell founders to be in this quadrant. I think that is usually a big fallacy (not always, but most of the time). This is the most obvious path and often attracts relentless competition, and as it says Peter Theilcompetition is for losers.
Trace this path only if you know a secret in an industry and are one of the few people in the world solving the problem with a known superpower to circumvent competition. That equation will create a holy grail company.
In my opinion, mediocre investors and founders run away from here because there is no apparent “hair on fire” problem to solve.
This quadrant attracts resilient, product-focused founders who execute with a long-term horizon. They believe relentlessly in this future; similar to an artist, who is creating a beautiful work of art.
This quadrant attracts resilient, product-focused founders who execute with a long-term horizon. They believe relentlessly in this future; similar to an artist, who is creating a beautiful work of art.
Create something we didn't know we wanted, like iPhone and Airbnb. Both are activities that didn't seem painful, but often resulted in massive impact and return.
This quadrant is also counter-intuitive. Humans are used to what they already know, but they are not the best at imagining the future. One can not only be an artist, but also a good artist. Artists fade away, artists continue creating new things. Artists set trends, artists jump into fashion.
I think the best products of our generation are created here, by artists… iPhone, Airbnb, Stripe, Facebook, Monzo, Zoom, Uber, etc.
Paul Graham has written an amazing post about Schlep's blindness here
From an economic unit perspective, the CAC may be relatively high here initially; However, with world-class product execution, one tends to create a growth trajectory by word of mouth.
You can only know if you're in this quadrant if everyone you talk to tends to say “you're crazy, this isn't going to work” OR “this is already a solved problem, why are you spending your time here?”
Many luxury brands, such as Louis Vuitton, fall into this quadrant. It's not the most interesting thing for me personally, but it's exceptionally difficult to build something meaningful and big here. I admire all the founders thriving here, so much to learn from people like Amancio Ortega (founder of Zara), Bernard Arnault and Virgil Abloh.
I would hesitate to rate D2C brands in this quadrant. I use frequency of product used (disposition) and brand loyalty to help evaluate those ideas. Web does an amazing job unpacking D2C brands and I would follow him for those insights.
As Howard Marks puts it:
“To achieve superior investment results, your perception of value must be superior. Therefore, you need to learn things that others don't see, see things differently, or do a better job of analyzing them, ideally all three.”
Someone sleeping on my couch? You're crazy? Nobody will do that.
Call a black car with a button? That's only for the rich. Plus, the taxi unions won't let that happen. There are countless stories out there. This quadrant tends to have a great return profile for investors and therefore investors. V.C. He loves these types of companies.
However, step into this quadrant consciously. Just because you have apparent product-market fit doesn't always equate to a good business in its current form and can quickly become “crazy and wrong.”
People can pivot and create exciting unit economics if the company has some PMF. In my personal experience, there is usually a binary PMF with crazy type companies. Either people and VCs care enough for you to keep iterating, or they don't.
An interesting example where there is a Loco y Derecho product market fit (PMF) but almost impossible to monetize at the risk level is that of anonymous commenting apps. We have all seen Whisper, Secret and Yikyak in the top 10 of the app store. Whisper is the only one that has somewhat monetized this market. I wonder if YOLO Q&A will survive long enough to find a way to make money. This all becomes crazy and wrong.
All companies that have PMFs with attractive unit economics end up in this quadrant. Although these companies were not agreed upon from the beginning, they end up accumulating 2-3 years of advantage over their competitors.
The Samweer brothers of Rocket Internet are famous for taking advantage of companies that found product market fit for crazy ideas and relentlessly copied those in the European market. China used to be known for copying ideas too; However, we are seeing a transition of copycats to brilliant ideas being generated from China with North America making the copies. Fascinating time to be alive.
Many investors become optimistic about a model or founder and begin to pile money into these companies, believing that growth trumps all. As the company grows, they recognize that the fundamental unit economics beneath the business will not improve with scale or product iterations.
I think this is still good for an ecosystem in contained doses without becoming a bubble. A healthy amount of experimentation and risk-taking derives new ideas, develops people's risk appetite, and trains talent. It's usually hard to know at the beginning that your company will be crazy and right, so the risk of building something unusual should be encouraged.
Ultimately, your idea is a starting point and often not the final destination. Many companies are not what started the original idea.
Most importantly, the best framework is to get paying customers or customers who love your product. At the end of the day, your customers (or lack thereof) will tell you whether your idea is valuable or not.
