Two Models for New Companies

You do not need VC funding or a "great idea!!!!" Instead, reduce pain.

There are two ways to approach new-product creation:

Model 1: Start with a "great idea!!!!". Find potential customers; Build small pieces of that idea incrementally and get continuous feedback as you're building. Adjust the idea based on the feedback, perhaps pivoting to a different idea entirely…

Model 2: Start by talking to potential customers and learning what the pain points are. Collaborate on a possible solution to relieve a tiny part of that pain. (I can't emphasize "tiny" too much. We're talking maybe a month's work on the outside.) Build it, modifying as needed based on feedback you collect as you work. At this point, you have something you can sell. Identify the next small way to relieve the pain…

(There's actually a third model, which is Model 1 without the potential customers and incremental releases for feedback and adjustment. That one pretty much always fails.)

Startups are often built on Model 1 because there's more scope for innovation, but only 1 out of 1,000 of those succeed at best. (Don't be confused by the 1:10 success:failure ratio cited by VCs. That number accounts for only those ideas that actually got VC funding.) This is a very high-risk approach, particularly if you skip that "find potential customers" step or the feedback-and-adjust loop is too long. That's not to say it doesn't work. Facebook and Twitter were both built on this model, for example. However, you have a high chance of building something nobody wants, and that potential pivot can be very expensive. Model 1 can pay off with a unicorn company, but most of us don't want or need that, and it takes a lot of resources (and money) to make it work.

Successful companies more often than not use Model 2, and they frequently do that with no VC funding at all. This is a much lower-risk model, maybe not as sexy as Model 1, but if your goal is to build a small, successful company, it's by far the better approach. For one thing, you're starting out with a guaranteed market, and you know what solving that particular pain point is worth to them.

People often ask me, "How can I find a place to work that aligns with your thinking?" That's possible, but it may be harder than forming a Model-2 company. You don't need a lot of up-front funding. Just identify the pain and relieve it. Also, you don't need to do this alone. That's what friends are for 😄.