Two non-business model-related questions I like to ask when evaluating a company's potential are, "Why are you the ideal team to solve this problem?", and "What unique belief do you have that explains why no one else has started this company?" I believe these two questions can give great insight into the potential upside of the venture and the probability of success. In the first of this two part piece, I'll discuss the question, "What unique belief do you have that explains why no one else has started this company?" This can be a framework for creating highly innovative products -- it's a high risk, high reward proposition as compared to creating a progressive product that solves a discrete need. To identify opportunities there, a better approach might be to identify existing behaviors or processes that can be improved with software and use Lean methodology to validate or invalidate your hypotheses and create something that people will buy.
What unique belief do you have that explains why no one else has started this company?
Opportunities with the biggest potential upside tend to have big predictions associated with them, and generally the more ambitious or contrarian, the prediction, the greater the potential upside. Companies making a small prediction or no prediction tend to be entering competitive markets or simply making small improvements over existing companies. For example, everyone now agrees that people like social networks, so there is competition and therefore less potential upside in starting a social networking site now.
Predictions can be about consumer behavior. Netscape believed that people would want to use the Internet and created a web browser to enable them to. PayPal believed that people would want to send each other money via email. Twitter believed that people wanted to talk about their daily activities in 140 characters or less. Google believes that people want to wear technology and have created Google glasses to capitalize on it.
Predictions can be about macroeconomics. For example, Peter Thiel believes in globalization and that the United States' trade deficit is unsustainable. He therefore believes that either imports will decrease or imports will increase. To capitalize on this prediction he looks to agricultural technology for opportunities because that's where the U.S. has comparative advantage in exports.
Predictions about political regulations. For example, debates and developments around healthcare reform has driven wild swings in the stock prices companies affected. A prediction that marijuana will be completely legalized might encourage one to get a head start on building a company that would capitalize on the change.
Identifying opportunities
In addition to having the ability to predict macroeconomic, sociological, consumer behavior, and other trends, opportunities can present themselves by having a contrarian belief. Sometimes doing the opposite of what the common consensus is can present big opportunity. For example, when there's widespread consensus that a given company will perform well and their stock price will rise, there can be opportunity in doing the opposite, taking a short position, because the belief is already priced into the stock -- all the money that will be invested in the stock, already has been, so the only change will be if the belief changes and people start selling.
To start identifying opportunities, one can ask questions such as, "What don't people like to talk about?," "What's socially or politically inappropriate to do?", and "What's 'un-cool'?"
For example, it's a widespread practice for people to be in a monogamous relationships. Society, at least in the United States, is generally uncomfortable talking about sexual desires. People like to conform to social norms. In their book, Sex at Dawn, authors Christopher Ryan and Cacilda Jethá use evidence from anthropology, archaeology, primatology, anatomy, and psychosexuality to validate their belief that monomogomy is far from human nature. Just ask Frank the Tank -- it's a comedy but definitely a common feeling.
Another thing people don't like to talk about is their desire to make friends. Most people don't like to admit that their social life is less than they desire. Serial entrepreneur, Sean Parker, co-founded Airtime by taking a contrarian view on this matter. His team of influential and highly respected people, large marketing budget and quality product may change this norm.
In education, telling people not to go to college is not seen as being very politically correct. The widespread belief is that everyone should get a college education. But maybe we need blue-collar workers for the economy to function properly. And maybe this widespread belief has caused an over-inflation in the price of education that is disproportional to the return. I believe it has. (Read more here: "A College Education Just Isn't Worth the Money Anymore.")
Another question to ask in trying to identify opportunities is, "What aren't people doing or looking at?"
Founder's Fund has identified nutrition as such a field. Most top scientists have gone into fields other than nutrition over the past couple of decades. Universities don't let you major in nutrition. Nutrition has been under-funded. Most of the major studies were done decades ago. The food groups may be completely wrong at this point because of how we evolve. In addition, we have on obesity problem.
You can also ask the inverses: "What are people doing?," "What does everyone believe in or feel pressured to believe in?," etc., and do the opposite.
This logic might help to explain why investment in clean tech has had such disappointing results. People are concerned about the environment, therefore investing in clean-tech was fashionable.
Conclusion
The key is not just making predictions or having unique beliefs, it's about the size of the belief, being right about it, and timing.
Predictions that are wrong are not valuable. A question to answer in evaluating the opportunity is whether or not you agree with the belief. For example, if I believed people are going to get tired of carrying tablets, I might start some kind of an etch-a-sketch company, but that's probably not true so I wouldn't start that company. In addition, a small prediction, such as people prefer water bottles with a square shape over a round shape will not have significant upside potential. There are of course some other problems with that hypothesis which I will address in the second part of this piece.
Lastly, timing: If the future is too far away, the company won't have enough of a cash runway to capitalize on the shift. If the future is too close, or already here, then there will be too much competition.
A good analogy is surfing: You want to start paddling before the wave arrives (timing), hope there is actually is a wave (be right about the belief), and hope it's a big one (size of the belief).
To develop meaningful and disruptive innovation, I believe we need to question all existing beliefs and have vision about what the future holds. We can't be afraid to buck social conditioning or take risk. My next post will be about how to best capitalize.