This is James Currier with NFX, where a Pete stage venture capital firm started by a group of entrepreneurs. The NFX podcast aims to discover for the founder community what it takes to build iconic companies. This is the hidden patterns of great startup ideas. We work with a lot of founders who have prior startup experience. Either as repeat founders or team leaders from successful high growth companies.
They come to us knowing they wanna start a company, but they are still in the process of coming up with their new startup idea. This is not as easy as it often sounds in the telling after the fact. Successful entrepreneurs rarely tell the story of the 1st few months where they battle to find a good idea. In reality, most top founders go through a rigorous ideation process to come up with the idea we know them for today. It's often said that success is 1% inspiration and 99% perspiration.
In other words, 1% of success comes from the idea 99% comes from execution. We disagree. This might be true at later stages, but at the initial stage of a startup, the core idea makes a huge difference Small changes in your initial idea or direction will make a big difference to where you end up. With a great idea, it's a multiplier for all your efforts down the Flint, compounding over time, going in the wrong direction, waste your life's energies.
In fact, we believe the biggest waste in our startup VC ecosystem is great people working on mediocre ideas, Note that it's just as hard to build a mediocre company as a transformative one. Both will take a 100% of your time, so you might as well work on a bigger idea.
As founders who started more than 10 companies and exited for more than 10,000,000,000, we feel a responsibility to share what we discovered about great startup ideas with other founders so you're not wasting your life synergies on a mediocre idea. We've identified a total of 15 frameworks to help founders refine their startup ideas and move from left to right on the chart above, and today we'll share 5 of them. Framework number 1, innovate just enough.
As an innovator, it's tempting to come up with something a 100% But the truth is that nothing is a 100% original. And the more you strike out in your own path, lets you know where it's headed. It feels glorious to go all in on something crazy, but novelty is a risk, too much of it, and you're almost certain to fail. Of course, too little of it, and you're just a redundant copy of something else, which is also a recipe for failure. What's needed is a balance of both.
One way to strike that balance is to apply a framing that we learned from the gaming industry when making a new video change only one element from what came before. In gaming, there are 3 big elements. Number 1, platform, PC, internet, mobile, Facebook, console. Number 2, core mechanics, examples would be building conquest, slots, collecting first person shooter, etcetera. Number 3, the theme as a Morgan as at Vikings, pirates, Atlanta, space, vampires, mafia.
Perhaps changing only one of these 3 helps you focus. Don't over stretch. Don't try to change everything at once. Be aware of what parts of your idea you're testing that are new and what parts of your idea you can count on working. The biggest idea is often strike a balance between what has been proven to work and something totally new. Iteration can be a form of innovate most of the companies you admire as innovative actually operate in the new energy category, which is a balance.
The second framework, leverage technological shifts. Without a big tech shift underlying your idea, it's less likely to be a breakout hit. Enabling technologies matter and timing your startup idea. Can you identify what technology has changed in the last 3 to 36 months that will let you create a new product, a new experience, examples to spur your thinking.
For ride hailing, paying for taxis was commonplace, but the advent of the smartphone allowed sidecar Flint and Uber to show you a car coming to you on a map in real time after you ordered it with the tap of a button. It also allowed frictionless instantaneous in app payment so that you didn't have to get out cash or a credit card.
Another idea, Beller management, the very wealthy have always been able to afford to pay people to manage and invest their savings, but financial APIs in the late aughts let Wealthfront extend a similar service to people with about $10,000 of net worth instead of 5,000,000 or video sharing. Video hosting has been around for a long time. Broadband penetration in 2007 set the stage for YouTube's breakout success. Before that, YouTube wouldn't have been viable.
Looked for a new product experience in proven areas is only possible recently due to a recent technological shift. Framework number 3, take more risks This is a framework that originally came from Howard Marks of Oaktree, which I learned via Andy Ratcliffe of Wealthfront. Marks realized that many of the biggest ideas both identified some new truth while at the same time being non consensus ideas, meaning most people didn't think they looked like good ideas at the beginning.
Such contrarian ideas allow you to compete in a less crowded Morgan, and thus they give you a greater ability to take market share and win before others catch on. This is particularly how when network effect businesses and in consumer businesses, doing something that looks stupid or like a toy can turn out to be prescient test your ideas against this framework. Framework number 4, solving a problem versus creating opportunity.
If you were making a pitch deck for Facebook, Supercell, or Slack, could you have convincingly articulated a problem that you're trying to solve? Not easily. However, you could have easily framed the idea as This would be awesome. Many investors say that all pitch decks need to articulate the problem they're solving. We don't agree. Many great companies can't be and weren't conceived that way.
When evaluating ideas, you should certainly think about how much they are solving a clear problem, but also think about what new opportunities they might be creating. Your conceptualization of the business will be very different depending on how much of each you have. Framework number 5, market risk versus execution risk. Market risk is when you don't know if anyone will want what you are building. Execution risk is when you don't know if you can execute at a world class level on the idea.
Twitter is an example of a successful company that took on market risk. Would people really want to broadcast a 140 characters to whoever happened to be listening turned out they did, but even after Twitter found a market, they still had to deal with execution risk. Could they keep the site up at such scale? They barely managed it, so it happened to work out. SpaceX is an example of a company that took almost no market risk.
Elon Musk knew that there were many potential clients who would wanna buy trips to space for satellite. Rather, SpaceX took on a huge amount of execution risk, could a small team with only a few $100,000,000 in financing actually send payloads to space, Second time founders and their investors often have more confidence in the founder's ability to execute.
So they are willing to face down incumbents and competition in a proven market, betting on their ability to acute better than existing players. These ideas carry clear execution risk and less market risk up front. An example of second time founders going after execution risk only are things like the new full stack companies taking established businesses head on, laminated insurance, honor, and home nursing, compass and residential real estate brokerage, etcetera.
First time founders often need to avoid incumbents and direct competition in order to get going. And thus, they target unusual non consensus ideas. They're likely to take on more market risk initially as a result, but companies with initial market risk will eventually face execution risk as well at a later stage. Evaluate your ideas to see how much of each of these two risks it takes on and which you are better suited to solve. Getting aimed in the right direction.
Small differences in initial state yield wildly different outcomes. Chaos theory. We'll be writing more about startup ideas in the coming months, But our hope is that the frameworks we shared here will help both veteran and first time founders navigate their idea space, even if we can't work with them directly. Guidance, insight, and pattern recognition from VCs was always helpful to us and our own journeys as founders, and we'd like to pay it forward.
NFX has 10 more frameworks that we use to help founders navigate toward better ideas, both before they launch, as well as when they're already in flight. We're creating a group of top founders to discuss these frameworks in small private forums so we can work with founders directly in order to find ideas that best fit both them and the market. To get more articles like this and join the forum, go to nfx.com.