Too Many Startups (and the 3 questions that’ll keep you out of that group)

“You run a startup that helps people start startups? Ha! You know this is a bubble, right? How many ‘instagram for dogs’ can there be!?”

This is what most people are thinking when I tell them what I do (probably). They are usually more polite. But the message is clear… I’m part of the problem.

Are companies being started that shouldn’t be? Yep. But that’s like saying too many people are writing. Too much writing isn’t the problem, boring writing is. I realize I just set the bar high for this post, but my point stands. It’s not that too many people are starting companies — it’s that too many bad companies are being started. Companies that rely on luck in the wrong places.

This is avoidable, and it starts with your idea.

I’ve always wanted to open a restaurant. A bustling, neighborhood place with simple food and fresh, seasonal ingredients.

I’d heard the horror stories of restaurant margins, so I decided I’d also prepare food that had been pre-ordered during off hours. I’d package and deliver it to be reheated, utilizing downtime and stabilizing inventory.
I started moving on my idea — “Dato’s” — in business school in 2010. I booked lunch with a professor to talk it through. He cut me off 10 seconds in.

“Brian, you know how to make a small fortune? Take a big fortune and open up a restaurant. What else have you got?”

The conversation was over. He wouldn’t hear another word about it.

His pessimism gnawed at me. I realize I’m optimistic, but I still didn’t understand how he could write something off so quickly. It wasn’t just a restaurant — I was creating a new model by leveraging off-hours to optimize supply. C’mon.

I later learned he’d been in the food business for years. He knew the margins and had seen every approach to “fix” the market. His experience told him that if I was set on sourcing and preparing the food, my best case scenario was “profitable.” The chance that a massive company was lurking was too small for him to spend even a second on.

You can fix product and team, he said, but you can’t fix market. And the market dynamics stink.

I’ve learned a lot from the first 13 startups that have gone through my pre-accelerator program, Tacklebox, but one lesson stands above the rest. I’ve dubbed it my “Restaurant Rule.”

If you can’t answer three specific questions about your product, I turn into that crotchety old professor. I don’t want to hear about it. I don’t care if you might stumble ass-backwards into something. I’m in the business of luck, but luck in the right places.

If you can’t answer these questions, I’m out.

If you can… I’m all in.

Every founder I’ve worked with at Tacklebox is smart, capable, and talented — they were hand-picked from a large application pool. Every founder worked extremely hard. There hasn’t been a dud in the bunch.

So why have some outperformed?

It’s pretty straightforward. They were supremely confident in the answer to these three questions:

  1. Who will get value from the first iteration of the thing you’ll make?
  2. How do you convey that value in a way your customers can understand and easily repeat?
  3. How will you find these customers cheaply, quickly, and in a way they trust?

There wasn’t even a modicum of doubt. Their startup was inevitable. The path was clear, the initial customer base was defined, the value was obvious. Those that could answer these questions were good.

The others…

And of course by “good” I mean in no way were they good — you might’ve heard that this entrepreneurship thing is hard. We still have to figure out how to build a team that can execute on a well designed, focused, and differentiated product, get that product to customers, do it in a way that’s profitable, sustainable, and scalable, get lucky breaks on everything from traction to funding to team to introductions along the way, etc.

But that’s the stuff entrepreneurs sign up for. That’s the stuff you can make happen.

The risk should never live in the answer to any of the three above questions. The risk should lie in execution.

This means that traction early on needs to be traceable — We found Jim and knew Jim would like what we’re doing. We were able to easily explain the value, and he was sold. He then told Jennifer. He was able to explain the value of the product, and she got it immediately. She loved it and told Bill and Susan.

It can’t be “we sprayed this out to 40,000 people on Facebook and 27 clicked on it.”

You need to flip the funnel upside down and start on the narrow end to really know if you’ve got anything. That narrow funnel means face to face, finding people who actually care.

Every traditional customer acquisition path early on will be too cluttered for you to really break through. You’ll only grow initially through word of mouth. So that “word” — the value — better be easy to understand and spread.

This seems obvious, but founders often take for granted that if they build something people will find value in it. If you need to convince your initial customers they have a problem, if your value doesn’t resonate with them immediately, or if you’re convincing yourself they’ll get value out of it, you’re in trouble.

I was jealous of the level of clarity some of our startups had. They’d nailed the hardest part.

And those without clarity — the ones that couldn’t yet answer those questions convincingly — they were fine, too. I think this is one of the main reasons doomed ideas are getting built. Founders don’t have the insight they need but grind away anyway. They aren’t supremely confident in their idea but need to keep going to prove to themselves that this was worth the effort.

Having a bad idea is not a reflection on you as an entrepreneur. Pursuing a bad idea is.

Embrace that you haven’t nailed the three questions yet, and be thankful that you’ve got another opportunity to nail them.

Ignore this, and you’re building a restaurant.

Part 2 — how to find ideas and evaluate / answer these questions — coming soon. Get it emailed when it’s live here.

We help founders with full-time jobs validate their startup before they quit. The posts are tactics we use.

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