Chris Dixon at Startup School 2013

So today I'm going to talk about good ideas that look like bad ideas.

So there's a great, my clicker is not working. Sorry, technical problems there. Okay, thanks. Oops! So there's a great PG blog post where he talks about Peter Thiel came to talk and said basically there's two kinds of ideas; sorry, that there are good ideas and there are things that seem like bad ideas. 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 intuition is that good ideas that look like good ideas are already being worked on by, you know, academics, governments, and 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 or the things that everyone else thinks are bad ideas, but we think, you know, we discover are actually good ideas.

I'm going to give somebody, start with some sort of high-profile historical example. So it's hard to sort of imagine this 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 search was dominated by large portals like Yahoo and Lycos and Excite, and they actually thought of search as kind of a loss leader. Their real business was being a portal and putting display ads everywhere. In fact, if you go back and look at all of the literature at the time, people, the sort of, 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 morality or whatever, some of the sort of things everyone's trying to have. You wanted stickiness; maybe people stuck on 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 the large portal tried it out. He's like, “This works too well. The problem is people are gonna leave my site. Can you make it work less well and actually give me bad results?” It's a true story.

And so the point is that Google came in. I mean, obviously, Google had amazing technology, but in some ways, their insight was actually this very contrary business idea of getting people off the website and that no one had any idea how they'd make money. I know one VC who went to visit the house of the Google founders who were staying there, working at, they were working in the garage, and actually snuck out the back so he wouldn't have to meet somebody who was 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, seemed to most people like this kind of weird niche, you know, kind of hipster activity, something that maybe seemed like the mission or, you know, Brooklyn or something like this. You know, like who's gonna stay on someone else's couch? You know, and lots of great people, investors who've, you know, 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 jury's 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, you know, the Internet had just started. It just, you know, just been invented a few years ago, or at least commercialized a few years ago, and sort of, to most people, that looked like, why would you want to go and take stuff out of your attic and stuff you'd sell at the garage sale and sell it online? Like lawn gnomes and all this kind of stuff! It basically seemed like one to be kind of a niche weird behavior.

And by the way, that was before there were kind of these modern ways to do online payments like PayPal. So you literally, like, the idea was I'm gonna put my lawn gnome on the web, someone across in Florida or something is going to buy it and they're gonna send me a check through the mail. All right? What just seemed kind of like a preposterous thing.

And actually, a funny side anecdote is the founder, Pierre Omidyar, was sort of a hobbyist who had a bunch of different interests and when he pitched meeseeks, 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, is that the pitch was you go to his site and there's an Ebola virus and then eBay auction website. So you can imagine how that was received.

So then the question is, if yeah, so how do you develop a good idea that looks like a bad idea as an entrepreneur? And the answer is, you need to know a secret. And by secret here, I mean secret in the kind of Peter Thiel sense, if you've read those great class notes, Blake Masters' 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 do you develop a secret? And I think there are a few ways, and I'll talk about them here. One of the ways is to know the tools better than anyone else. Usually in our business, in sort of the software business, the tools mean knowing, you know, computer science and technology better than anyone else.

So an example here is Dropbox. I actually knew Drew. I started my first company 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 I remember he came and he was like, "Look, I want to do a cloud storage thing." This is like, I forgot the—2007 or something. And at the time, that actually cloud storage had been a big trend in venture capital.

So I remember looking with him at like a TechCrunch 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 you step back and look at it from this big-picture point of view, it seemed like, 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 other competitor software, it was like this totally janky web thing, and you like click on it, you wait 10 minutes and you download the file, then you have to upload it with all, you know. It's just totally like, it was basically made by sort of business people who were like, "Cloud storage is the future."

And you know, what he realized was that to do it right, you know, you had to do, like you had to feel like it was a local hard drive, right? You 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 know, you got to do like the NAT hole punching and like the, you know, syncing 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. 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 founder CEO, Perry Chen, he actually came from kind of the artistic community, kind of one of the people that would be doing a project today on Kickstarter. He was living in New Orleans and at one point wanted to put 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, 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 know, sort of a patronage model for the Arts and just sort of understanding this was a normal behavior both among the kind of backers and the project creators. But you know, many, many people whose job it is to identify good ideas, I thought this was a very bad idea for a long time.

So another way to come up with a secret is to draw from your own kind of life experience background. I'll just talk about myself, my own experience here for a second. So I started a company called SiteAdvisor back in 2004. This was when, this was kind of I think of that as 2004 is kind of the worst period, at least in the modern and probably ever, I think, on the web in terms of security problems. If you remember, for you know, for those of you remember, there was, there you probably all of your friends were complaining about getting pop-up ads, and they were using Internet Explorer on a PC and there were just like pop-up ads everywhere, phishing everywhere. It was kind of a mess.

The question then was why didn't all of the incumbent security companies like McAfee and Symantec do anything about it? The reason is that they saw Stacey there; 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, you know, whatever OS exploit or something. And most of the problems that were happening then were what we would have known as social engineering problems, which means 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 so we, the idea here, so I think, well 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. 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 kind of means necessary."

And it’s funny because like, we went and talked to and a lot 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 pitched a ton of VCs, and it was this really frustrating thing where it felt like to us like it was as obvious as like, you know, whatever, 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 phishing tour?” like trying to put you in all these categories.

And I've noticed that like when you sort 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 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 high-level characteristics 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 very famous example here is the telephone, which basically when the telephone was invented, the incumbent company at the time was Western Union, who used telegraph systems to, you know, primarily for people like railroads to communicate across the country.

When the telephone was first invented, it can only go like a mile or something like this. And so, you know, what the Western Union said is this isn’t, this doesn’t solve the problems of our customers. Also, the idea of like voice applications, like what are you gonna do with voice? Like there, you can actually go back and, it kind of sounds funny now, but you actually go back and read it. And people were 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 underestimated is kind of the classic Clay Christensen thing, where if you're familiar with his book "Innovative Dilemma," there's this famous curve, which is sort of the rate at which technology gets better is sort of like this, and the kind of demands on 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'd like back in 2003, I had the opportunity to actually work on 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. Our big concern, if you go back, was that most people didn't have microphones on their computers, and would they, you know, be willing to drive down to Best Buy? This is actually in the memo, you know, it was like microphone adoption was like the key issue. And so it’s again, it's like you people all be willing to go and drive to, you know, Best Buy or whatever you, whatever, 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 and narrowband adoption. Will broadband ever get adopted? I remember hearing McKinsey, like, you know, the head of McKinsey explained to me that no one would ever adopt broadband or something.

And so anyway, so Skype and the other, actually the time also, if you were Vonage, Vonage was sort of the one that people were kind of more excited about. Skype also had problems connecting to the pot 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 look using those words.

Okay, so another key characteristic of good ideas that look like bad ideas is that they unbundle the functions done by others. So let me explain this with an example; newspapers. So one way to think of newspapers is as sort of a collection of functions. There's the brand of the newspaper. You know, if I read the New York Times, I may be 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 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 fell swoop. It happens piece by piece. And so first, the internet itself came along. You 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 classifieds. 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 Facebook and, you know, just email and whatever else, and suddenly, you know, a lot of people started getting, yeah, you know, a lot, 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, it’s determined by what's shared with them on Twitter, Facebook, etc. So then the curatorial function goes away. And I would argue sort of the last function is starting to go away, which I use Nate Silver as an example, which is, you know, 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 to the organization.

So an example here is MOOCs. Udacity, we're investors in, there's also Coursera. So if you read a lot of the kind of, you know, mainstream press about MOOCs, 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 coursework, it's tests, it's maybe plays a job sort of recruiting function, right? If what you should expect is that the same pattern that played out 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 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 that look like bad ideas is they often originate as hobbies. The kind of the mental model I use is that in the startup world, we kind of have basically two constituencies; we have businesspeople, and we have technical people. And each of the two constituencies has a method of voting on what they think is interesting in the future.

Businesspeople's way of voting is by allocating money at the workplace. So that, 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 engine, of course, technical businesspeople, but the basic idea is that some of the smartest engineers, 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 this plays out, I mean it’s amazingly how predictable this kind of heuristic is. Going back to obviously the Homebrew Computer Club with Jobs and Wozniak, the Homebrew Computer Club with Jobs and Wozniak, a lot of the things around the PC originated from hobbyists.

The web did a lot of, you know, webpage builders, people creating websites and browsers and things like this. 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 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, you know, this stuff tends to get dismissed as bad ideas by kind of the mainstream because, "Oh, that's a toy; that's a hobbyist thing," etc. So just give you an example: GitHub, which, you know, a lot of—I mean, GitHub, of course, is based literally on an open source project.

But also, I think you can think of it as one way to think of it is that the work processes that GitHub enables began in the hobbyist and the open source sort of hobbyist community where you had large distributed kind of non-hierarchical or semi-hierarchical groups trying to work together and coordinate. And it turns out, I think, well, we believe we're investors in GitHub, but it turns out that you have a very same kind of work process within large organizations.

So if you look at it like an eBay or something, and people working all over the place, semi-structured, need a way to coordinate. So just an example of kind of a tool and a process that began in the sort of hobbyist world and has made its way into the workplace.

Another characteristic of good ideas that 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, it's hard to think about it; it's starting to realize now. But Flickr, so Flickr had many innovations, but one of the key ones was that it defaulted photos to being public.

So prior to Flickr, there were online photo repositories, but they were all private ones, like Shutterfly, where you'd upload your photos, maybe share them with a few friends. And, you know, it was really shocking to people that you would go and default into public. Like, what kind of behavior is that? Facebook is another good example where, you know, we've seen it repeatedly where Facebook made various changes to sort of how sharing and other things work.

Probably most famously with the change to the newsfeed where they were sort of an outcry and, you know, sort of challenged these social norms. But now has become, you know, the innovations Facebook made there have now become, you know, mostly just 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 presentation itself as a secret. The way I learned this was like with all secrets, sort of through direct experience. I just sort of both being a book, 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, both that I’d made, and I probably at this point heard thousands of investment pitches and made dozens of investments, missed dozens of good investments and went through and kind of tried to look systematically at what the best predictor would have been. 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 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 and analogies; you know, I'm gonna 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 and read a, whatever, an analyst report in the New York Times, it tends to just be an encapsulation of conventional wisdom, whereas the opportunities tend to lie kind of in, you know, when you take your direct experience and dip it with the conventional wisdom—that's where the good startup ideas are.

What's it? Thanks.