Great Startups Start With a Problem
Problems are the guiding light for founders to build solutions around. Problems are also the guiding light for investors to decide whether a company is a good investment.
When we started investing in early-stage companies, we were taught that founders, markets, and products make up a great investment. You have to invest in world-class teams attacking large markets with products 10x better than the alternative. Great founders, markets, and products are all important considerations for investing in startups, but they all originate from the problem the company is founded to solve.
Great founders understand a problem intimately, bordering on obsession. A smart, talented operator is not a great founder for a business where they don’t understand the problem they’re trying to solve in depth. The problem is the opportunity. Problems are always opportunities. The problem also describes the customer in need and therefore defines the true market. When a founder knows the problem and the customer in need, he or she can build a great product to solve the customer’s problem.
A problem is something that causes a customer to suffer. To solve a problem is to alleviate suffering. The alleviation of suffering is what creates value which manifests itself as a better experience for the customer and revenue for the company.
We believe there are only three meaningful problems around which to build a venture-scale business:
1. Cost – something is too expensive.
2. Convenience – something is too hard to do or find.
3. Moral – something is immoral to a certain group.
Cost is an eternal problem. People would almost always rather pay less for the same quality, real and perceived (except for luxury goods). Cost tends to be the easiest problem to convey because it’s so obvious, although sometimes that leads to ignorance about why current offerings are so expensive. Founders solving cost problems need to develop novel solutions to reduce their own cost of manufacturing or operation, so they can pass savings on to customers.
Dollar Shave Club
Problem: Decent razor blades are too expensive.
Solution: Deliver “f*cking great” blades to your door every month at a reasonable price.
Problem: On-prem software installation and maintenance is too expensive.
Solution: Host software in the cloud that is just as reliable as on-prem, reducing deployment costs.
Problem: Space travel is too expensive.
Solution: Reuse rocket components to reduce the cost of launches.
Competing on cost alone is rarely an attractive business model unless you do it at great scale like Walmart, which is by definition almost impossible for a small, startup company. Building a brand is important for all startups regardless of what kind of problem they solve but even more so for companies solving a cost problem. Even though a company’s product costs less than incumbents, those companies have to make their customers believe the product is just as good or even better so they can achieve decent margins. Thus, price is rarely the lead benefit for a company solving a cost problem.
Warby Parker doesn’t sell cheaper glasses, they sell really cool glasses that just happen to cost less.
Convenience problems aren’t as tangible as cost problems because there’s no easy number to relate to when describing convenience. Convenience problems tend to result from government regulation or legacy incumbent solutions that are at least passable in modernized markets. Convenience problems are reflected by difficult-to-use, inconvenient, or hard-to-find existing solutions.
Convenience solutions are fundamentally about reducing friction for the customer, which saves them time. Peter Thiel wrote about great companies being 10x better than the alternative. This is the mandate to solve convenience problems.
Problem: It’s too hard to find what you’re looking for online.
Solution: Superior search technology that just works.
Problem: It’s inconvenient to hail a black car. (Uber later solved a cost problem for broader transport, which is what drove their largest success.)
Solution: Hail a car by pressing a button on your phone.
Problem: It’s too hard for online vendors to set up payments.
Solution: Set up online payments in minutes.
The solutions built by all of these companies save users time. Time savings as compared to alternatives is the most valuable measuring stick for convenience solutions.
Moral problems happen when societal opinions change around previously unchallenged solutions or behaviors, usually driven by some vocal minority that has more qualms about the problem than the user base at large. Companies solving moral solutions should focus on serving these socially-conscious users first.
Problem: Automobiles are bad for the environment, but there’s no viable alternative to traditional gas vehicles.
Solution: The world’s best EV.
Problem: Cigarettes cause cancer, but I still want to smoke, and there’s no way to inhale nicotine without carcinogens.
Solution: A vaporizer that avoids burning tobacco for nicotine consumption.
Problem: I care about animal welfare and sustainability, but I enjoy meat.
Solution: Plant-based products that look and taste like meat.
Moral solutions need to operate within the constraints of established user expectations and behavior. These companies accepted that consumers love the existing experiences around cars, cigarettes, and meat. To create viable replacements, they each had to recreate the same experiences while eliminating the moral problem. Tesla couldn’t just build an electric vehicle, they had to build an electric vehicle as good as any gas car on the market. Beyond Meat couldn’t just make a new soy burger, they had to recreate the look, feel, smell, and taste of meat.
To build a massive business, moral solution companies need to convince mainstream users of existing products to care enough about the moral problem to switch or, more likely, make their products meaningfully better than the existing solution.
One may argue that there are many unsolved problems begging for a solution, and that’s true. Unsolved problems are identifiable by saying “something doesn’t exist.” Companies often fix unsolved problems as a precursor to ultimately solving cost, convenience, or moral problems for customers.
Plaid is an example. Prior to Plaid, infrastructure to collect financial data from banks to build a consumer fintech application didn’t exist. Plaid solved an unsolved problem — that there was no pre-existing piping to integrate with banks — but their business solves a convenience problem for their customers that don’t want to build the infrastructure themselves.
Academics and scientists also often solve unsolved problems. Eventually, we will cure diseases like cancer and Alzheimer’s. After solutions are created, businesses form to make them more affordable or more accessible (cost and convenience).
Focus on the Problem
Understanding what kind of problem a business is trying to solve is critical for both entrepreneur and investor because it defines the focus of the solution. If you assume a cost problem is actually a convenience problem, you’re likely to focus on developing novel ways to reduce friction for the customer when you should be focused on developing novel ways to reduce operational cost. Many companies touch on more than one problem category — cost and convenience frequently overlap — but only one problem should be the core focus with any crossover resulting as a byproduct of the solution to the core.
Don’t overcomplicate defining a problem. It’s probably simpler than you make it out to be: Something’s too expensive, something’s inconvenient, or something’s morally unsettling. The sooner you embrace the simplicity of your problem, the sooner you can obsess over it and then solve it.
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.