Chris Dixon at Startup School 2013

0:00 so today I'm going to talk about good ideas that look like bad ideas so there's a greats sorry my clickers not working sorry technical problems there okay thanks whoops so there's a great PG blog post where he talks about Peter teal came to talk and said basically there's two kinds of ideas

0:30 sorry that there are good ideas and there are things that seem like bad ideas and most startups are in The Sweet Spot in the middle which are good ideas that seem like bad ideas so today I'm going to basically expound on this idea a little bit so why good ideas look like bad ideas the kind of the the intuition is that good ideas that look like good ideas are already being worked on by you know academics governments and

0:53 most of all kind of large companies so for example I you know I want a smartphone that has 10x the battery life and a better screen and more apps and everything else and Apple and Samsung and everyone else are hard at work on that so sort of by definition you know we investors and entrepreneurs are kind of in the business of the leftovers of the things that everyone else thinks are bad ideas but but we think are you know we we

1:20 discover are actually good ideas and I'm going to give some so let me start with some sort of high-profile historical example so it's hard to to sort of Imagine This is now but back in I think it was 98 when Google first launched they were actually very late to the search engine World at the time the the sear search was dominated by large portals like Yahoo and lyos and excite and they actually thought of search as kind of a loss leader their

1:52 real business was being a a portal and and and putting display ads everywhere in fact if you go back and look at all of the literature at the time people sort of the you know the Press reports and things like this everyone was talking about stickiness stickiness was kind of the key and it was like sort of today would be like verality or whatever some of the sort of things everyone's trying to have you wanted stickiness me people stuck on

2:15 your website so that you could show them more ads Google was the opposite of it it was so incredibly good at finding the right search results that people would immediately leave the website in fact there's a famous anecdote where the Google guys were trying to when they first started off trying to sell their technology for like a million dollars to one of the large portals and the CEO of large portal tried out he's like this works too well

2:36 the problem is people are going to leave my site can you make it work less well and like actually give me bad results it's a true story and so the point is that Google came in I mean obviously Google had an amazing technology but in some ways their Insight was actually this very contrarian business idea of getting people off the website and no one had any idea how they'd make money I know one VC who went to visit

3:00 the house that the Google Founders were staying they working at they working out of the garage and actually snuck out the back so he wouldn't have to meet somebody who's working on a search engine because it seemed like such an obviously bad idea another good example here is Airbnb which you know we all know now is one of the great successes of our sort of the modern startup era and of course came from YC Airbnb when it first started off it

3:22 seemed to most people like this kind of weird Niche you know kind of hipster activity something that maybe you'd see in like the mission or you know Brooklyn or something like this you know like who's going to stay on someone else's couch you know you know and and lots of great PE investors who've you know and and sort of Industry observers who've been very smart about things all thought this is sort of this weird Niche behavior and you know it's

3:47 jury still out but it seems as if it's on its way to being kind of almost a replacement to the hotel industry eBay is another one which maybe this crowd is a little bit going back in time but it's it's sort of hard to imagine now but when eBay first came out the the the you know this the internet had just started it just you know just been invented a few years ago and or at least been commercialized a few years

4:10 ago and and sort of to most people it looked like why would you want to go and take stuff out of your attic and stuff you'd sell in a garage sale and sell it online like lawn gnomes and all this kind of stuff is basically so it seemed like one to be kind of a niche weird behavior and two by the way that was before there were kind of these modern ways to to do online payments

4:30 like PayPal so you literally like the idea was I'm going to put my lawn gnome on the web someone across in Florida or something is going to buy it and they're going to send me a check through the mail right which just seemed kind of like a Preposterous thing and actually a funny side anecdote is the the founder Pierre omdar was sort of a hobbyist who had a bunch of different interests and when he pitched VCS he

4:52 he was just showing his sort of personal homepage and one of his interests was the Ebola virus so from what I've heard from the VCS that the pitch was you go to his site and there's Ebola virus and then eBay auction website so you can imagine how that was received so then the question is if you know so how do you develop a good idea that looks like a bad idea as an entrepreneur and the answer is you

5:17 need to know a secret and by secret here I mean secret in the kind of Peter teal sense if you've read his those great class notes Blake master's class notes about the course he taught which he defines as something you believe that most other people don't believe so then the question is how how do you develop a secret and I think there are a few ways and I'll talk about them here one of the ways to

5:42 know the tools better than anyone else usually in our business in sort of the software business the tools means knowing you know computer science and technology better than anyone else so example here is Dropbox I actually knew Drew I started my first company was in Boston when he was in Boston and I actually was trying to recruit him for a long time because he's a great obviously genius and he I I remember he came and he he was like look I want

6:09 to do a cloud storage thing this is like I forgot 2007 or something and at the time the actually cloud storage had been a big Trend in venture capital and so I remember looking with him at like a tech crunch article that was like literally like a hundred cloud storage companies had launched in the last two years half of whom had been Venture funded you know and just sort of if you step back and like look at it from this

6:33 big picture point of view it seemed like a you know a crazy thing to do like to enter such a crowded Market I think my take on it is what he realized is that so if you actually use that software the the other the competitor software it was like this totally janky like web thing and you like click on it and you wait 10 minutes and you download the file and then you have to upload it

6:53 with all you know it was just totally like it was basically made by sort of business people who are like cloud storage of the future and you know what he realized was that to do it right you know you had to do like it had to feel like it was a local hard drive right it had to which of course we all know from the way it works now which is actually a very non-trivial technical problem to do it reliably and like you

7:13 know you got to do like the natat hole punching and like the you know sinking and and making sure you know taking care of all these adverse conditions it turned out to be actually like it made sense in the end that sort of an MIT you know brilliant engineer was the one who kind of cracked that problem another way to know a secret is to know the problems better than anyone else so an example here's Kickstarter

7:38 most people you know who probably most of you first heard of Kickstarter probably around 2010 or so when they kind of got big the founders were actually working on the idea for about 10 years and trying to raise money the the the founder CEO Perry Chen he he he actually came from kind of the artistic Community kind of one of the people would be doing a project today on Kickstarter he was living in New Orleans and at one point wanted to put

8:06 together a music festival and had a bunch of people who wanted to go to the music festival and willing to pay had musicians who were willing to play if they could do it and had no way to coordinate the two which you know as we know now is sort of what Kickstarter does he also was aware of you know being deeply into that Community was aware of sort of the history of it all going back to like Renaissance Italy of like you

8:24 know sort of a patronage model for the Arts and and and just sort of understanding this was a this was a a normal behavior both among the kind of backers and the project creators but you know many many people who whose job it is to identify good ideas thought this was a very bad idea for a long time so another way to to come up with a secret is to draw from your own kind of life experience

8:50 background I'll just talk about myself my own experience here for a second so I started a company called C adviser back in 2004 this is when this was kind of I think of that as 200 4 is kind of the worst period at least in the modern probably ever I think on the of the web in terms of security problems if you remember for you know for those of you who remember there was there you probably all of your friends were

9:12 complaining about getting popup ads and they were using Internet Explorer on a PC and there just like pop pads everywhere fishing everywhere it was kind of a mess the the question then was why didn't all of the incumbent security companies like maafi and semantic do anything about it they the reason is that they saw Stacy their they saw their mandate as being solving kind of technical problems meaning making sure there isn't an exploit in the browser making sure there isn't a

9:37 you know whatever an OS exploit or something and most of the problems that were happening then were what we what are known as social engineering problems which means the that that basically everything was all of the technical features were operating properly but you know users were tricked into doing things and in fact so their solution was to put out white papers that said you know users should be smarter about downloading software or something like this and

10:05 so we the idea here so I think what we had a kind of a unique Advantage is that we didn't kind of come from to this from the security world we came to it from the consumer internet world where we didn't sort of see these kinds of religious boundaries between Technical and social engineering threats and saw it much more as a consumer internet person would as let's just try to create a better user experience using whatever

10:25 kind of means necessary and it's funny because like we went and talked to and a lot of of our investors went and talked to people at the incumbent security companies and they all said it was a terrible idea for the reasons I just said and I remember pitching and VCS I pitch a ton of VCS and and it it was this really frustrating thing where it it felt like to us like it was as obvious as like you know whatever

10:48 this bottle of water sitting on the table can't you see this bottle of water and they were like no I can't see what are you talking about and like is it a fishing tool or is it an anti-py like trying to put you in all these categories and I've noticed that like when you of I think when you sort of really develop a secret it actually ends up being quite frustrating talking to the people that haven't because you're

11:05 just sort of trying to show them what you think is obvious but they can't see so now I want to talk just a little bit about some of the sort of highle characteristics of of these kinds of good ideas that look like bad ideas one of them is that powerful people will often dismiss them as toys so a a very famous example here is the telephone which basically when the telephone was invented the incumbent company at

11:34 the time was Western Union who used Telegraph systems to you know primarily for people like railroads to communic communicate across the country the when the telephone was first invented it could only go like a mile or something like this and so you know what the Western Union said is this isn't this isn't solve the problems of our customers also the the idea of like voice applications like what are you going to do with voice like you can

12:02 actually go back and it's kind of sounds funny now but you actually go back and read it and people are like what's the point of voice we already can encode the information in Morse code and like there's nothing else you want to do and so they had the opportunity to buy the technology very cheaply and didn't and of course what they underestimate is kind of the classic Klay Christensen thing where if you're familiar with his books innovator dilemma there's this

12:23 famous curve which is sort of the rate at which technology gets better is sort of like this and the kind of Demands on Tech technology doesn't go up as fast and what that means is that the technology often quickly catches up and while it's at that kind of low point it often looks like a toy to a lot of people a modern example of this is Skype years ago I like back in 2003 I had the opportunity to actually work on

12:45 as as part of a team that worked on one of the early investments in Skype and helped write one of the memos for the investment and our big it sounds funny now but all this stuff sounds funny in in retrospect our big concern you go back was that people most people didn't have microphones in their computers and would they you know be willing to drive down to best spot this is actually in the memo you know it like microphone adoption was

13:09 like the key issue and so again it's would people all be willing to go and drive to you know Best Buy or whatever whatever and and do that the other thing was the quality was lower of course that got better as bandwidth got better I think that was another issue was Broadband narrow band adoption will Broadband ever get adopted I remember hearing McKenzie like you know the head of McKenzie explained to me that no one would ever adopt Broadband

13:32 or something and so anyway so so the the so skyp and the other actually the time also if you remember Vonage Vonage was sort of the one that people were kind of more excited about Skype also had problems connecting to the pots sort of telephone system but you literally if you go back you'll see people said it like all of the telephone incumbents said it was a toy like using those words okay so another key characteristic of good ideas

13:58 look like bad IDE is is that they unbundle the functions done by others so let me explain this with the example of newspapers so one way to think of newspapers is as as sort of a collection of functions there's the brand of the newspaper you know if I read the New York Times I'm maybe more likely to trust it than if I read something else there's the curatorial function which is you know the New York Times tells you

14:19 what's important based on what it puts on the front page there's distribution you know prior to the internet the New York Times would print newspapers and drive around and deliver them classified ads you know back then was an important function and so then you know what happened is over time each of those functions kind of got picked off one by one so this is important like it doesn't happen with a lot of these things like kind of in one

14:44 Fell Swoop it happens piece by piece and so first the internet itself came along you you could read the New York Times online suddenly what's the point of getting it printed and distributed to you right and then you know then Craigslist came along and you know it's a better way to do classifi they're all in the same place Etc right so that sort of picks off that function and then social came along you know Twitter and

15:05 Facebook and you know just email and whatever else and and suddenly you know a lot of people started getting you know no the curatorial function of like what's on the front page became less and less important right so far more people now you know what they read if they read the New York Times to the extent they read it that's determined by what's shared with him on Twitter Facebook Etc so then the curatorial function goes away and I would argue

15:28 sort of the last function is starting to go away which I use Nate silver as an example which is you know the the individual reporters now because of these other distribution mechanisms and Twitter and Facebook Etc are able to build up their own audiences which in some ways becomes you know the audience becomes more loyal to the individual contributor than U to the to the organization so an example here muk's Udacity we investors in there's also

15:52 corsera so if you read a lot of the kind of you know mainstream press about about mukes they'll say they'll say things like oh that doesn't replace you know the university experience and what they're missing is that it's not supposed to replace it you should think of a university as a bundle of multiple functions so you know it's a social experience it's a credentialing service you know you went to so- and so school that's a credential it's a

16:18 it's coursework it's tests it's maybe a plays a job kind of recruiting function right it so if what you should expect is that the the the the same pattern that played out over with newspapers over the last 20 years I believe will play out in education over the next 10 to 20 years but you'll see things happen layer by layer and because it happens layer by layer all of the kind of mainstream pundits sort of look at each layer and

16:44 they say that layer is stupid you know it's only one part of it right which of course is the whole point of it and that's why they just miss it as a bad idea so another key characteristic of these good ideas look like bad ideas is they often originate as Hobbies the kind of the mental model I use is that in the in the startup World U we kind of have basically two constituencies we have business people

17:07 and we have technical people and each of the two constituencies has a has a method of voting on what they think is is interesting in the future business people's way of voting is by allocating money at the workplace so that's you know now includes me as a venture capitalist it includes the CEO of a company or a head of a department you know Engineers you know I'm simplifying the of course technical business people but but the basic idea

17:34 is that that some of the smartest Engineers they they don't get to vote with their dollars but they do get to vote with their time and so they vote with their time by working on what they think the coolest stuff is on the weekends and at night and and this plays out I mean it's it's amazingly how how predictable predictive this kind of heris is going back to obviously The Homebrew computer club with wobs and jobs so jobs and wnc

18:00 sorry so The Homebrew computer club with jobs and wnc the of course the PC you know sort of a lot of the sort of things around the PC originated blogs started out as hobbyist the among hobbyists the web did a lot of you know web P both people creating websites and browsers and things like this the so many open source things started that way you know so today if you sort of look around you'll see people working on what

18:31 you know what is it like I mean it's you guys I assume and it's Bitcoin and 3D printing and you know drones and like whatever a whole bunch of interesting like you know Big Data Frameworks and all this other kind of cool stuff so so you know this stuff tends to get dismissed as a as bad ideas by kind of the mainstream because oh that's a toy that's a hobbyist thing Etc so I just give you an example of GitHub which

18:55 you know a lot of I mean GitHub of course is based literally on an open source project get as you guys know but but also I think you can think of it as one way to think of it is that the sort of the work the work processes the GitHub that GitHub enables began in the hobbyist in the open source sort of hobbyist community where you had large distributed kind of non-h hierarchical or semi- hierarchical groups trying to work together and

19:23 coordinate and it turns out I think well we believe we're investors get but it turns out that you have a very same kind of work process within large organizations so if you look at like an eBay or something and people working all over the place they're semi-structured they need a way to coordinate so just an example of kind of a tool and a process that began in the in the sort of hobbyist world and has made its way into the workplace

19:53 another characteristic of good ideas look like bad ideas is that they often challenge social norms so you know we talked about how people sort of got that kind of queasy feeling around Airbnb and eBay I think that you know that you that it's hard to think about it's hard to realize now but Flickr so flicker had many Innovations but one of the key ones was that it defaulted photos to being public so prior to flicker there were online photo

20:21 repositories but they were all private ones like Shutterfly where you'd upload your photos and maybe share them with a few friends and you know it was really shocking to people that you would go and default them to public like what kind of behavior is that Facebook is another good example where you know we've seen it repeatedly where Facebook made made various changes to sort of how sharing and other things work probably most famously with the change

20:47 to the news feed where there was sort of an outcry and you know sort of challenge the social norms but now has become you know the things that the Innovations Facebook made there have now become you know mostly just sort of sort of standard UI devices and sort of all modern social software so to wrap it up a little bit so how did I learn the secret not to be kind of sort of like cutely recursive but I sort of think of this

21:12 presentation itself as a secret the the way I learned this was like with all secret sort of through direct experience I just sort of both being a both through my sort of my own startups but then through Angel Investing I actually went back kind of systematically and looked at all of the Investments the both that I'd made and I probably at this point heard th thousands of investment pitches and made dozens of Investments missed dozens of good Investments I

21:42 went through and kind of tried to look systematically at what the best predictor would have been and this came out as by far sort of whether the founder had you know some sort of technical expertise or you know problem domain expertise or some kind of direct experience where they'd sort of learned a secret and then just I guess just wrapping it up I would say you know if I were this I assume a lot of people here

22:07 are entrepreneurs or aspiring entrepreneurs I would encourage you to think about like I think there's sort of two ways to develop startup ideas one is through direct experience whether it's direct experience with tools as I was talking about like Technologies or direct experience with some problem or direct experiences that bring you to some perspective and there's another way to develop them which is like through sort of abstract things like analyst reports and Trends

22:40 and analogies you know I'm going to do Airbnb for y or Uber for x or that kind of thing and I think I think that in my opinion the best ideas come from direct experience not the abstract things and in fact sort of by definition because the abstract things tend to like if you go read a whatever an analyst report the New York Times it tends to just be an encapsulation of conventional wisdom whereas the opportunities tend

23:05 to lie kind of in you know when you take your direct experience and diff it with the conventional wisdom that's where the good startup ideas are that's it thanks