Paul Baran and Startup Research

Those who cannot remember the past are condemned to repeat it.

George Santayana, 1905

Ideas are free. Execution is everything. And you can save yourself a lot of trouble by Googling your idea before you start,writes Meng Wong.

The slideshow http://www.slideshare.net/mengwong/20110413-founder-institute accompanies this blog post; this material was put together for a talk at Founder Institute Singapore on April 13 2011.

My buddies and I at JFDI are often asked to play the role of investors and judges at business plan competitions and events like Founder Institute. And every time we judge a startup pitch, we find ourselves playing “name that tune”.

“Art Project” is easiest to spot. We usually call it before they even start talking: perfect teeth, perfect skin, dressed like a rich man’s youngest child. They don’t want to work for somebody else: Daddy doesn’t; why should they? They’d rather give back. Usually it’s a neat little technology-backed idea, or something social-enterprisey. Wouldn’t it be cool if strangers could share a taxi? Wouldn’t it be cool if my friends could help me choose my clothes for the day? Wouldn’t it be cool if I could use my iPhone to find a date? Wouldn’t it be cool if big companies offered internships to criminals on probation? Yes, it sure would; and it would also be cool if Daddy gave you a grant to do that, because until you can explain how every single moving part in that value chain will make money, what you’ve got is an art project pretending to be a startup.

And even if you can explain the business case, you still need to explain why you’re the right team to execute it, not some incumbent; half the ideas I hear are evolutionary, incremental innovations that are six months out on the product roadmap of some billion-dollar incumbent. You think you can predict what Blackberry should do next? Great. So can Blackberry. You think it would be cool to help restaurants build iPad menus? So does every iPad development house in the world.

That takes us to what I call “Patently Obvious”. “Golly gee,” the entrepreneur says, “wouldn’t it be cool if your iPhone could use facial recognition technology to automatically find people and look up their Facebook profile?”

Sure, that’s a good idea. Too bad Apple already had that idea five years ago, already bought a face-recognition company, already is putting face recognition into the iPhone. If anyone’s going to bring that technology to market, it’ll be Apple or Facebook. If you try to do that as a third party, you’re a sharecropper picking up pennies before a steamroller.

Most venture capitalists will be too polite to tell you this, but their due diligence process begins with measuring the cluelessness of the entrepreneur. Cluelessness comes in two kinds.

Technology cluelessness means the entrepreneur doesn’t know the prior art, isn’t at the cutting edge, hasn’t got a technical innovation to stand on.

Market cluelessness means the entrepreneur doesn’t know what the customer wants, doesn’t know who the competition is, often doesn’t even know the name of the industry or product category they’re trying to enter.

Very occasionally you see entrepreneurs who know exactly what they’re doing: they have secret sauce, they’re ahead of the game, and they’ve seized on a real customer problem and are halfway to their first sale. More often, though, a single pitch turns out to be 40% one kind of cluelessness and 60% the other, and there’s nothing to do but try to make it an educational experience for the founder.

This may sound harsh, but nothing worth doing was ever easy. We say this with all the compassion of a martial arts instructor. Better to spend five minutes, five hours, five days, five weeks learning from other people’s mistakes, no matter how harsh the advice, than five years making your own.

How can entrepreneurs avoid this trap? It’s not easy. Traditionally, new product development begins with R&D; and R&D begins with research. Research the prior art. Know your industry inside-out. Know your technology inside-out. It may take five years. It may take ten. Experience counts. Do your time in the mines. The best companies are started by founders who are scratching their own itch. The single best relationship you can have with your customer is to be one. The next best is to be married to one. You need to understand the customer you serve so well that you can predict every moment of frustration.

That’s why so many recent Internet startups have been founded by alpha geeks scratching their own itch. That scenario tends to check all four boxes. So if you’re a geek who stayed home learning to program instead of going out with your friends, and if you have no social skills, but can code better than anybody else you know … and if your loneliness drives you to seek connection through the Internet, then you’re Mark Zuckerberg.

I’m supposed to talk about research, but nowadays with agile development and learn startups, R&D go together, so I’m going to recommend a few books that deal with the development end of things.

• Steve Blank, Four Steps to the Epiphany
• Entrepreneur’s Guide to Customer Development
• Getting it Right the First Time

But how can you be a customer for a product that doesn’t exist yet? Maybe you’ve been using an early version of that product. Before there was Twitter, there was IRC. And in a lot of ways, Twitter is really just IRC, but with 1000% overhead, and a broadcast flag turned on. In the periodic table of protocols, they occupy the same column; Twitter is just one row down.

Or maybe you’ve got an extraordinary design sense; you’ve got the sort of visionary ability that turns every problem into a solution. Entrepreneurs tend to be multitalented individuals, good at Photoshop and Ruby and Excel and Google; they can write a business plan, they can sell to enterprises, they can sell to consumers, they can entertain a small child for hours. Specialization is for insects.

This approach tends to show a lot of humility: you tend to develop a respect for the prior art. Maybe familiarity breeds contempt, but until you’re familiar, you can’t be contemptuous. I’m going to keep coming back to this theme of prior art. I will begin by showing some prior art from other FI events, where other people have talked about Startup Research. Remember: good artists borrow; great artists steal. I’m going to steal a slide from Blue Run Ventures.

The Personal Question: Am I cut out to start a company?

The Vision Question: Is my idea “good enough” to go for it?

The Execution Question: Can I build this company?

Those are three questions that every entrepreneur needs to ask themselves. They are tough questions, so to help you answer them I’m going to offer a few frameworks for thinking through the issues.

At MBA school they will teach you the traditional framework. If you take a class in marketing they will teach you how to look at the market opportunity quantitatively, in terms of top-down and bottom-up numbers. I’m not going to talk about that. They will also teach you to do lots of customer research, qualitatively, to go and talk to lots of people and find out how their lives need improving. Very often they won’t know: it’s a fact of human psychology that everybody thinks they’re at 100% but only you know that they’re at 70%. So when you talk to them you’re not asking them, “tell me about your imperfections.” Half the time you’re observing them and making notes and you know more than they do. But I’m not going to talk about the specific methods of research either: you can read about that in the books. And finally the MBA guys will tell you to do some competitive research: draw a matrix of features and benefits, see where everybody else stacks up, and design your response accordingly. I’m not going to talk about that either; go read Blue Ocean Strategy.

What I want to talk about is a way of looking at startups that is a bit more fundamental. And there are two types of people that study the fundamentals of things: if you study the fundamentals of the world, you’re a scientist. If you study the fundamentals of human beings, you’re an artist. And startups are both a science and an art.

Who here is an artist? Who here is a scientist or an engineer?

Startups as a Science

If you’re a scientist or an engineer, I want to take you back to your native frame of mind, and consider the business as an experiment that pushes back the frontiers of knowledge. How so? The Popperian falsifiable hypothesis is that businesses like yours don’t work. You’re trying to falsify it by building a business that does. But as a scientist, you and all the other entrepreneurs who have come before you, and after you, are engaged in the collective enterprise of building an exhaustive list of ways in which your business doesn’t work. Seen in this light, businesses are like Edison’s failed light bulbs: it is to be expected that 9 out of 10 businesses fail, just as 9 out of 10 experiments fail; it is humbling to think that you should spend five years of your life making some discovery that is recorded in a single line in a register. But that’s how it goes, sometimes.

Most competitors take a slightly different approach to their business. This is basic theory: it’s called differentiation. If you’re doing something exactly the same as someone else, then when they fail, and then you fail too, the worst part of it is that you haven’t even learned anything new. Or if you succeed where they failed, it’s because the result was entirely due to chance. You won and they lost because you got lucky, really. People will admire you for your humility but unless you’re going to become a professional poker player nobody’s going to back you.

So you differentiate. You’re gambling that your competitors’ approach won’t work. They’re gambling that your approach won’t work. You’re all smart, motivated, hardworking people. Which of you will turn out to be right? That’s up to nature. If you’re trying to invent the light bulb, you’re trying a whole bunch of different things. Turns out nature likes light bulbs which use carbon filaments. And it turns out nature likes tungsten filaments even better. And it turns out that nature likes it when you surround the filament with chlorine, or bromine, or iodine. Each of these discoveries took time and money.

It’s the same thing in business. You differentiate. If you’re MySpace, your hypothesis is that the average user cares about dressing up their web pages. True. If you’re Facebook, your hypothesis is that the average user shouldn’t be allowed to dress up their web pages. Truer! So Facebook wins.

And then once you’ve proved one thing or another, you move on to new theories: people will find it useful to build apps that exchange data. Confirmed. People will want to use OAuth 2.0 to integrate logins across the web. Confirmed. If you’re Facebook, you’re pretty good at choosing your experiments. Facebook is an experiment that succeeded.

Some experiments fail. Wesabe, for example:

http://blog.precipice.org/why-wesabe-lost-to-mint

Now, the impressive thing about that post is the air of humility: in a sense, you are working humbly together with your competitors, not so much head-to-head but side-by-side; and when your experiment terminates, you egolessly write up a research report and move on to the next project.

Of course, if it succeeds, you get to be an investor, and fund the next generation of experiments. That’s part of the mission for JFDI, btw: to help bootstrap that ecosystem in Southeast Asia, to turn founders into funders, inventors into investors.

Good investors look for someone who can give a detailed explanation of why their business doesn’t already exist.

Let’s look at some of the possible reasons.

Why Hasn’t Someone Else Done Your Startup Already?

1. Actually someone already has. Maybe you want to build a direct competitor to somebody who’s already out there doing something that’s successful. Why are you doing this?

Imagine you’re an investor and somebody comes to you and says “Normally I make $10,000 a month at my job as a professor at NUS, researching stem cells. But I’m going to quit that job, and I’d like to start a business that is an exact clone of BreadTalk, down to the pork floss buns. Wherever they have a store, we will open a store right next door. Whatever pricing they set, we will follow.” So that’s an exact clone. The reaction of the scientist is likely to be the same as the reaction of an investor, which is: “why would you bother?”

Somebody else has already falsified your hypothesis. We know people like to eat bread and sugar. There’s nothing new to be done here. Now in science people do sometimes repeat other people’s experiments, just to be sure they can. But business is a little different: the first successful experiment tends to eat the others.

1b. Maybe all it needs is a tweak, and it could be ten times more valuable.

Maybe the hypothesis is that “2011 is the year for doing X; everybody who started that business in 2010 was just too early.” That could be true. If some startup is doing something that you are using, and all your friends are using, that’s great. But if you could imagine some kind of spin on that, which would get your mother and your grandmother and your younger brother using it, that would be ten times as big. So you have a new hypothesis that’s based off the old hypothesis.

2. Nobody’s ever had the idea before. Usually this turns out to be false. Usually this turns out to be a sign that the founder doesn’t actually know their industry very well. Because if they did know the industry, if they did have ten years of experience and are currently VP of something or other in a leading company within that business, they would know that every year a slew of startups show up at the industry conferences with more or less that idea, and the next year they’re replaced by a completely different set of startups also with that idea, and every year each set just keeps on failing.

I prefer a model of innovation where every possible idea is constantly being had all the time. This model has more in common with the saying that with an infinite number of monkeys and typewriters you will get Shakespeare. Or the idea of quantum foam, in which subatomic particles are constantly coming into existence and then annihilating themselves. Or the idea that on Youtube every imaginable video is constantly being uploaded and most of it is shit.

So in my model of innovation, every possible idea is being had, and people are constantly throwing them at the wall and sometimes it sticks.http://www.madetostick.com/thebook/

Simultaneous invention is inevitable.

http://www.kk.org/thetechnium/archives/2009/08/progression_of.php

In my experience, when a founder says that nobody has had that idea before, what they really mean is one of three things:

2a. They personally have never had that idea before, and they are so excited they forgot how to use Google.

2b. Everybody who has had that idea in the past has failed for one reason or another. And there isn’t even a website left. “They tried and failed? They tried and died.”

2c. There are vendors in that market, but they’re stuck on PR, awareness, promotion, customer education. Why? Because only after spending three months actively searching as a customer do you find out that the product is even available. How is a new entrant going to solve the promotion problem?

The traditional layperson concept of innovation is that some smart person is sitting under an apple tree, and an apple falls on him, and suddenly he’s got a new idea in his head that never existed before, and then fast forward two years and he’s bathing in champagne.

But suppose you succeed. You get to the point that your company is up and running and you’ve got a little website and people hear about you from word of mouth. But you’re serving a niche which doesn’t exactly make you a household name. Now suppose there’s an MBA class at INSEAD, or a Founder Institute in 2013, and nobody there has heard of you, and one of the participants says, “hey, let’s do this idea.”

3. It’s nice, but not nice enough for a lot of people to care. This is an art project.

4. It’s nice, but not cheap enough for a lot of people to buy. This is an art project.

The love of money may be the root of all evil, but in business, we just use money as a metric. We use it to measure value. Ceteris paribus, given ten different ways for to spend your time and energy, one of them is going to bring more value to the world than the others. One of them is going to be more enjoyable than the others. One of them is going to be the startup you were born to do: you’re the best person in the world qualified to execute that idea. Take the product of those three factors and pick the startup with the highest composite score.

5. Previous teams couldn’t execute. Maybe they couldn’t raise money. Or the founder managed to piss off every single employee. Or the team gave up because they got a better job offer. Or they chose to locate their startup in an earthquake zone and they got wiped out. Or maybe they only had one server and it crashed. These things do happen. Magnolia got wiped out by a hard drive crash.

6. Previous startups chose the wrong market segment to go after. Wrong demographic, wrong geographic region, B2B versus B2C. Maybe you want to prove that something that worked in Canada will also work in Indonesia. Regional differentiation is OK.

7. Previous teams were too early; some external enabler was absent. It takes time for broadband penetration and cloud costs to get to the point that a business can make money streaming video.

8. Previous teams lacked secret sauce; some internal enabler was absent. Maybe they were trying to solve a really hard problem and they just couldn’t crack the solution. Ask yourself this question: what am I better at than anybody else in the world? What can you do that no-one else can do? Stephen King is the best person in the world at writing bestselling horror fiction. J.K. Rowling is the best person in the world at writing bestselling fantasy. What are you better at doing than anybody else in the room? Better at doing than anybody else you know? I want to know what field of endeavour you’re at the cutting edge of, because that automatically sets you apart from the competition.

I have a friend who just did a PhD in neuro-electronics. You would think that the next startup he does is probably going to be something to do with neuro-electronics, but you’d be wrong; it turns out his father is a university professor and has already been running a neuro-electronics startup for the last five years. So even for people like that it’s not easy.

9. Previous teams moved too slow. Previous teams tried to build something too big.

10. Previous teams weren’t agile enough to keep up with competition.

This leads me to the profile of an ideal startup founder, or startup team. They know something better than anyone else in the world: they are at the forefront of the frontier of innovation. And they’re used to being a customer.

In addition to doing all of this original thinking, you should also stand on the shoulders of giants.

Archaeofuturism Case Study: Paul Baran

Forty years ago, in 1971, Paul Baran (1926–2011), co-founder of the Institute for the Future, wrote down some use cases for the packet-switching ARPAnet that spawned today’s Internet.

Baran is a classic example of an engineer who became an entrepreneur. He invented packet switching, without which the Internet wouldn’t exist. Every word you read, every picture you see online was packet switched on its way to your eyeballs. But he didn’t stop there. He thought long and hard about how networks would change the world. He created concrete scenarios, specific use cases. He asked himself how ordinary people would use future technologies. He founded seven companies, three of which hit a billion dollars in annual revenue. He died last week at the age of 84.

Would you like to see the prophecies of a dead man? Remember: these words were written in 1971.

Toward a Study of Future Urban High-Capacity Telecommunications Systems, Brief descriptions of potential home information services. (thanks BoingBoingfor sharing!)

1. Cashless-Society Transactions.

Recording of any financial transactions with a hard copy output to buyer and seller, a permanent record and updating of balance in computer memory.

PayPal. every bank.

2. Dedicated Newspaper.

A set of pages with printed and graphic information, possibly including photographs, the organization of which has been predetermined by the usr to suit his preferences.

instapaper. paper.li.

3. Computer-Aided School Instruction.

At the very minimum, the computer determines the day’s assignment for each pupil and, at the endo fthe day, receives the day’s progress report. At its most complex, such a service would use a real-time, interactive video color display with voice input and output and an appropriate program suited to each pupil’s progress and temperament.

Khan Academy.

4. Shopping Transactions (Store Catalogs).

Interactive programs, perhaps video-assisted, which describe or show goods at request of the buyer, advise him of the price, location, delivery time, etc.

Amazon. eBay. ecommerce generally.

5. Person-To-Person (paid work at home).

Switched video and facsimile service substituting for normal day’s contacts of a middle-class managerial personnel where daily contacts are of mostly routine nature. May also apply to contacts with the public of the receptionist, doctor, or his assistant.

Skype. Acquired

Elance.

Zopim.

LivePerson.

Imified.

6. Plays and Movies from a Video Library.

Selection of all plays and movies. Color and good sound are required.

Netflix.

Amazon Digital Cloud.

Apple iTunes Music Store.

7. Computer Tutor.

From a library of self-help programs available, a computer, in an interactive mode, will coach the pupil (typically adult) in the chosen subject.

Khan Academy.

8. Message Recording.

Probably of currently available type but may include video memory (a patient showing doctor the rash he has developed).

Google Voice.

9. Secretarial Assistance.

Written or dictated letters can be typed by a remotely situated secretary.

Evernote OCR.

http://www.the24hoursecretary.com/digital-dictation-services.htm

http://www.speak-write.com/web/

http://wescribeit.com/

10. Household Mail and Messages.

Letters and notes transmitted directly to or from the house by means of home facsimile machines.

earthclassmail.com. email generally.

11. Mass Mail and Direct Advertising Mail.

Higher output, larger-sized pages, color output may be necessary to attract the attention of the recipient — otherwise similar to item 10 above.

Constant Contact. Email marketing. spam, heh.

12. Answering Services.

Stored incoming messages or notes whom to call — possibly computer logic recognizing emergency situation and diverting the call.

Onoes, Skype is not an emergency call service! Google Voice. VoIP generally.

13. Grocery Price List, Information, and Ordering.

Grocery price list is used as an example of up-to-the-minute, updated information about perishable foodstuffs. Video color display may be needed to examine selected merchandise. Ordering follows.

freshdirect.com.

14. Access to Company Files.

Information in files is coded for security; regularly updated files are available with cross-references indicating the code where more detailed information is stored. Synthesis also may be available.

google apps.

dropbox.

atlassian. corporate wikis and knowledgebases. salesforce.com.

15. Fares and Ticket Reservations.

As provided by travel agencies now but more comprehensive and faster. Cheapest rates, information regarding the differences between carriers with respect to service, menus, etc. may be available.

priceline. orbitz. expedia.

16. Past and Forthcoming Events.

Events, dates of events, and their brief description; short previews of future theater plays; and recordings of past events.

eventful. upcoming. eventbrite. amiando. etc.

17. Correspondence School.

Taped or live high school, university, and vocational courses available on request with an option to either audit or graduate. Course on TV, paper support on facsimile.

Open University

MIT Open Courseware

http://www.open.ac.uk/

18. Daily Calendar and Reminder About Appointments.

Prerecorded special appointments and regularly occurring appointments stored as a programmed reminder.

calendar.google.com

19. Computer-Assisted Meetings.

The computer participates as a partner in a meeting, answering questions of fact, deriving correlations, and extrapolating trends.

irc bots. google chat guru. wikipedia. wolfram alpha. Tableau Software.

20. Newspaper, Electronic, General.

Daily newspaper, possibly printed during the night, available in time for breakfast. Special editions following major news breaks.

http://www.newspaperdirect.com/

21. Adult Evening Courses on TV.

Noninteractive, broadcast mode, live courses on TV — wider choice of subjects than at present.

ted.com. http://www.open.ac.uk/ MIT OpenCourseware.

22. Banking Services.

Money orders, transfers, advice.

e-banking generally. next-gen personal finance like mint.com, lendingclub.com.

23. Legal Information.

Directory of lawyers, computerized legal counseling giving precedents, rulings in similar cases, describing jurisdiction of various courts and changes of successful suits in a particular area of litigation.

lexis-nexis.

24. Special Sales Information.

Any sales within the distances specified by the user and for items specified by him will be “flashed” onto the home display unit.

groupon, foursquare, chalkboard.

25. Consumers’ Advisory Service.

Equivalent of Consumer Reports, giving best buy, products rated “acceptable”, etc.

Amazon reviews

epinions

nextag

26. Weather Bureau.

Country-wide, regional forecasts or special forecasts (farmers, fishermen), hurricane and tornado warnings similar to current special forecast services.

weather.com. cwarn.org, aidcom.

27. Bus, Train, and Air Scheduling.

Centrally available information with one number to call.

http://tripplanner.transit.511.org/mtc/XSLT_TRIP_REQUEST2?language=en

28. Restaurants.

Following a query for a type of restaurant (Japanese, for instance), reservations, menu, prices are shown. Displays of dishes, location of tables, may be included.

opentable.com. yelp.com.

29. Library Access.

After an interactive “browsing” with a “librarian computer” and a quotation for the cost of hard copy facsimile or a slow-scan video transmission, a book or a magazine is transmitted to the home.

o’reilly safari bookshelf. kindle bookstore. your actual library. http://www.googleartproject.com/

30. Index, All Services Served by the Home Terminal.

Includes prices or charges of the above, or available communications services.

Google!

In Conclusion

The point of all this is to show that ideas are free. Execution is everything. If you had a bright idea, probably somebody else had that idea before you. You think Newton invented calculus? So did Leibniz. You think the Wright Brothers invented the airplane? Richard Peers flew two years earlier, in New Zealand.

There’s gold to be mined in the archives of innovation. Check out blogs like paleofuture. Read the classic authors of futurology, like Alvin Toffler. Read science fiction, whose secret is: it’s not about the future, it’s about the present. Read Neal Stephenson, Charlie Stross, William Gibson, Bruce Sterling. They inspired a generation of engineers to build the world we live in today. If you haven’t read those books, you’re in Santayana’s crosshairs.

One final point. Some companies are an exercise in self-expression. How do you write a great novel? By having a great soul. The novel you should write is the novel only you can write. Same with startups.

The most unexpected thing to discover in startup research is something about yourself. You and your co-founders might be going into business for very different reasons. Some people go into business because they think they don’t want to work for anybody else. Or because they want to set their own hours. Or because they want to have friends. Or because they want to impress girls with a business card that says “CEO”. Or maybe they just want to get rich. Or change the world. Or prove that something can be done.

Why are you doing it?