Domain Expertise & Start Up Failure

Paul Graham on the most important question he asks founders:

Why did you pick this idea to work on?  Do you have domain expertise in this area?  How do you know people need what you’re making?

Chris Dixon:

Know the problem better than anyone else & Know the tools better than anyone else

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 Symptoms of Start Up Failure from Quora
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This is similar to the Invert, Always Invert Philosophy espoused by Charlie Munger.

“Invert, Always Invert. All I want to know is where I’m going to die, so I’ll never go there” – Charlie Munger

What are the causes of failure so that people can avoid them?

The most important recurring theme from all these people goes something like this:

  1. Did not build a product people love?
    1. Why? Because we don’t know what the market wanted?
      1. Why? Because we don’t have domain expertise? (see red answers) 
        1. Why? Because we don’t love the domain/customers?
    2. Why? Because we don’t have the capabilities to build the product people want? (see blue answers)

Next time, you hear a consultant/banker etc trying to build a photo sharing/mobile message/networking app, please give a big EYE ROLL.

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Startups: What are the early symptoms that a startup is going to fail?

First few months are passing and you are working on the product. Then you have decided that the product is too crappy to release. It turns out that 1.5 years have passed and you have just started selling. Within a few months, the company has no resources to survive….
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ANSWERS BY VARIOUS PEOPLE BELOW:
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I’m sure there are plenty more out there, but I look for these:

  1. No demonstrated user need. For example, consider 3D movies and TV. If you ask people why they sometimes prefer stage to screen, nobody ever says, “Oh, movies are only 2D.” 3D tech has novelty valuebut even a little user testing would show its pushers that most people are perfectly happy to go back to 2D movies after experiencing 3D, and that many actively avoid 3D. That wasn’t the case when sound or color or fancier special effects were added.
  2. Fear of testing hypotheses. As a founder, I can say it: most startups launch in a cloud of hype and bullshit. That hype is really useful: Startups are difficult and painful; you have to be really excited to do it. But the hype is also dangerous: It lets people assume they just can’t fail. If a startup team doesn’t seek contact with reality early and often, they will have a bunch of surprises in store. It hurts to find out your ideas are dumb, so you have to really want to know the truth more than you want to feel comfortable.
  3. No love for the audience. If you are going to spent years studying and serving people, I think you have to love them. YouTube’s first designer, who happens to be an old friend, would grab a video camera, hop on his motorcycle, and go to users’ houses to see them in their natural element. He’s a natural democratizer of technology, and wants people to get really involved in what he’s making.
  4. No love for the domain. I would never work at a sports startup, because I don’t care much about sports, and never will. If I’m going to do my best work, I really need to love what I’m going to spend all day thinking about. 
  5. No love for the team. Hostility between roles? Hostility between founders? Management that doesn’t really care for the employees? Employees that don’t care about one another? That company is probably doomed.
  6. A desire for perfection. Perfection kills. The things that your early adopters care about? Those should be awesome. Everything else? Fuck it. A team that has a hard time being pragmatic will spend a lot of their time and money on shit that doesn’t matter. And that will keep them from getting the product out early enough to get useful feedback.
  7. Not thinking about revenue. A lot of people want to make a product, not a business. What’s the difference? The latter makes enough money to pay the bills. I get it: products are exciting; commerce is banal and a little grubby. But until it’s a solid business, it’s not sustainable. Building shit without thinking about money? Really fun. But startups like that are just playing dress-up at $1m a year.
  8. Caring too much about what other people think. Some people are really worried about what the competition thinks. Or what their friends will think. Or what’s cool in Silicon Valley. Or even what their investors think. When instead they should be caring about what their users think, and whether they’re staying true to their own vision.
  9. Being in it for the wrong reasons. Is the company being built to flip? Are the people in it to get rich? Is the fun part showboating for the press and the digerati? Are they doing it just to build something they think people shouldwant? Are they high on a Big Idea? God help them.
  10. A high Dunning-Kruger quotient. The heart of the Dunning–Kruger effect is that clueless people can’t tell that they’re clueless. Teams that know that they don’t know much: generally awesome. Teams that think they know it all? Very dangerous.

Those are my top 10. I look forward to seeing what symptoms others have observed.

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These are the ones that I’ve seen:

  • No one seems to want the product you are building.
  • No one seems to want the product you are building.
  • No one seems to want the product you are building.
  • No one seems to want the product you are building.
  • No one seems to want the product you are building.

Anything else can be worked through.

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Hi,Here’s some of mine, partially taken from a rough checklist we use when we judge business plans.

  1. Founders lacks key competencies for their type of business – A great skill to have on the team doesn’t equate to a great skill for a particular business. Tour business with great guides but little marketing expertise or even (don’t laugh) 8 men considering starting a sanitary pad business.
  2. Founders lacks deep understanding of the market they are serving – often there are just too many nuances to a market that it takes years of living or working in the market to grasp it. Observers from the outside usually overestimate their understanding of a market.
  3. Chosen market is too small – niches that are too costly for big players to pursue effectively (aka ‘loose bricks’) are generally a good place to start. But niches that are really specialised (think exotic foreign take out) are probably better off staying something other than a full fledged full time business.
  4. Competition is too strong – this is usually the case when we ask the questions on how a business meaningfully differentiates itself, and who/where are the closest competitors.
  5. Cannot get into the market place – strong barriers to entry exist for certain industries (e.g. medical devices and services / services to children) in many countries. Some great ideas go quite far only to discover there are barriers that prevent the team from proceeding.
  6. No control over product development – if you’re a product centric company – then this is quality / branding / marketing / customer service problem waiting to happen. Have seen it work on social businesses though where perhaps the value proposition is quite different from the product itself
  7. Starting up with selling out to a big name buyer as the main exit strategy–  This always sounds appealing on the onset, but often one overestimates how much a company will be interested to buy you out. The incumbent might have enough in house expertise to recreate a better / more integrated version of what you are starting. Or the startup might just be viewed less of a threat than they imagine.
  8. No excitement outside the startup team – startups should fill a need in the market, however too often it is an imagined need that exists mainly in the minds of the founders. When the idea is pitched, there is a lot of ‘yes I guess that makes sense’ but very little ‘I would use it’.
  9. The numbers don’t work – there are judges who will disqualify startupsbecause they can’t put together a “proper” p/l – i actually think not being IFRS compliant is very forgivable at the startup stage – there is too much uncertainty in the early numbers anyway. BUT every startup needs to take a long hard look at cash flow to see long they can realistically ‘hang on’ depending on how fast cash is being spent and how much is left after all the suppliers etc are paid off. I understand there are many new business models out there where it’s not about paying off suppliers, but show me how the money side looks.
  10. Building for self, not customers – there’s a difference between what the founders think is a ‘must have’ feature and what the customers will pay for.

I’ve seen some good answers to this – hope this adds to the conversation.

Kind regards,
Jason

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The team members haven’t quit their old jobs, PhD programs or whatever it was they were doing before.The number of times I have heard something along the lines of “Our CTO still has his day job at Sun” or “He’s just finishing up his PhD and then he’ll be able to spend more time on the company” . . . fast forward 6 months and I hear about how they just couldn’t make it work, or so and so burnt out.

Lack of domain knowledge/not being the customer you are building a product for, which often leads to mentor whiplash.

We got completely conflicting advice at many points, but I was the consumer, so when we had equally smart people telling us opposite things, we went with our gut.

That gut feeling I think can really only be developed by being the consumer who will be using the product. Build it for yourself. When someone doesn’t have enough knowledge about the market they are targeting, more often than not they’ll take bad advice.

Multiple non-technical cofounders or “visionaries”, and one programmer.

This varies by business (for instance, a GroupOn type business probably doesn’t need as much of a technical founding team), but more often than not there is more programming work to be done in the first 6 months to a year than marketing/bizdev etc. If the founding team is 3/4ths MBAs and they have one dude whose the “marketing guru”, another guy whose “sales” and another guy whose the “visionary,” all roles that honestly should be filled by ONE person to start off, it says to me that, should they end up needing to pivot, they will figure out that they can’t move fast enough and create a new product with a bunch of MBAs.

Outsourcing their technical work

This is an extension of the third one: having a technical team on staff means you are more agile and can recognize opportunities. If they are outsourcing to India (and aren’t Indian and have connections there or something), this is a huge sign. They also probably won’t get investment, as a technical team mitigates the risk, worse comes to worse you can get acqui-hired and return the investment.

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