Rogish Reading Writing

Software, management, people.

How to Come Up With Profitable Business Ideas

A few days ago I came across this article from Indiehackers (a really cool site!) called “How to Come Up with Profitable Online Business Ideas”. It’s basically a giant list of folks that built something describing their process, which I guess is helpful to some degree, but ultimately feels like it misses the mark.

It opens with:

Interested in building a startup, or starting your own small business to make money on the side? Learn by example from dozens of entrepreneurs who share how they came up with great business ideas.

Immediately we’re missing the mark here – almost all of the quoted entrepreneurs with substantial revenue never sat down and said “What should I build? I have no idea!”. Breaking down the data, I calculated there were 15 entrepreneurs with little or no “domain expertise” (e.g. they sat down and said “What should I do?” or had an “Eureka!” moment) and 17 with substantial domain expertise (worked in the industry for a while that spawned the idea, etc.).

Breaking down the data, we see:

Domain Expertise? Average Rev Min Max StDev
N $9,745 $350 $100,000 $24,512
Y $59,659 $400 $270,000 $73,512

This is not a particularly scientific analysis but it does illustrate the point – if you’re sitting around going “What should I build?” you’re setting yourself up for failure. The pain should be obvious if you have expertise in a field.

Matt’s Oversimplified “How to Come up with Profitable Business Ideas” Algorithm

For a B2B SaaS company, the easiest/most likely1 algorithm to succeed2:

  1. Be embedded in the industry for a while
  2. Make lots of connections, build credibility
  3. Build SaaS app to solve key pain point you experienced in #1
  4. Sell to the folks you know from #2
  5. For bonus points/de-risking: find 30 potential customers (from #2) and reach out to them and validate this idea (Jobs-to-be-Done). Get a handful of them to commit, even verbally, to buy this when you’ve got an MVP built.
  1. Clearly this is not the only way to be successful, but “I have a random idea lemme build it” is a great way to be not successful
  2. Succeed = your business that makes enough revenue to support you and a reasonable lifestyle, equating (and/or eventually surpassing) what you would typically make at a W2 gig, from a diversity of customers and not trading your personal time for money.

Lessons From the Theranos Disaster

I recently had some time to myself (a rarity nowadays!) as I was doing a few transcon flights, so I picked up the new book on Theranos (Bad Blood: Secrets and Lies in a Silicon Valley Startup). I just finished the book – it’s a great read with a lot of interesting, painful lessons.

Silicon Valley’s VC “Cult of Personality” venerates the unstoppable, delusional young founder that builds the next Facebook when all the data shows us that – generally speaking – entrepreneurial success comes from knowledge, skills, and experience. Repeated studies1/data2 show that the average age of a successful startup founder is closer to 403 than 20.

I mean, sure, you can bang your head against the wall and build a web app in your dorm room and be the next Facebook. And yes, there are classes of problems that are fundamentally doable and if you want it done faster/cheaper, hiring a 20-something founder to work on it 250 hours a week will get you there. But Medical/health/devices are not that class of problem. I’m as startuppy as they come, but we’re talking about folks’ health and lives here. Moving fast and breaking people is a bad idea.

Wisdom is what separates someone with an idea and someone who will actually be successful. Theranos was the equivalent of “I have a dream of perpetual motion” and then investors going “wow that dream is great and you’re so passionate about it here’s $1B!” Theranos played to the worst of VC “we invest in people not ideas” trope, exploiting all the cognitive biases we see in investment disasters: FOMO, authority bias, similarity bias, ineffective oversight, and ignoring dysfunctional leadership/founders.

Fear of Missing Out

Walgreens got burnt to the tune of $140m after it turned out Theranos’ tests didn’t actually work. Walgreens is quoted in the book:

“We can’t not pursue this,” he said. “We can’t risk a scenario where CVS has a deal with them in six months and it ends up being real.”

Successful entrepreneurs use FOMO strategically to drive up value – either in a fundraising round or in selling the company. By leveraging loss aversion, Theranos was able to get Walgreens and Safeway to sink vast sums of time and money in partnerships that failed.

Ineffective Oversight

Who thought it was a good idea for a 19 year old to control a billion dollar company? Someone who was living with/in a relationship with the company president? 5 Where was the board? How did they get played so bad as to give Elizabeth complete control of the company? Why did the investors let her pack the board with irrelevant but influential people? 7

Did it have something to do with Tim Draper being a neighbor of Holmes?8

Terrible, Dysfunctional Leadership

By all accounts, Holmes and Balwani were terrible managers and ineffective leaders. Theranos hired amazing, smart people, and then fired them when they dared to claim the emperor had no clothes.

The biggest problem of all was the dysfunctional corporate culture in which it was being developed. Holmes and Balwani regarded anyone who raised a concern or an objection as a cynic and a nay-sayer. Employees who persisted in doing so were usually marginalized or fired, while sycophants were promoted.

and

they summoned the staff for an all-hands meeting in the cafeteria. Copies of The Alchemist, Paulo Coelho’s famous novel about an Andalusian shepherd boy who finds his destiny by going on a journey to Egypt, had been placed on every chair. Still visibly angry, Holmes told the gathered employees that she was building a religion. If there were any among them who didn’t believe, they should leave. Balwani put it more bluntly: Anyone not prepared to show complete devotion and unmitigated loyalty to the company should “get the fuck out.” 6

Requiem for a Dream

Theranos HQ
Theranos HQ

It doesn’t appear Theranos is going to exist much longer9. Holmes and Balwani may still face criminal charges; in the least, I sincerely hope they never raise any money, nor hold a position of power in any company ever again.

I hope that this event will cause investors to sit back and consider why they got played, but I doubt they will. There’s so much money sloshing around in Silicon Valley4 that it’s better to lose $100m shooting for $100b than it is to not play at all.

Footnotes

What a Difference a Year Makes

My last post was over a year after the previous post, and this one is almost a year late. So, I guess I’m improving.

Looking back, ReactiveOps has exceeded my expectations. We’re stable, growing, and profitable, and about to embark on our 2.0. I’m excited to tell you about it, but it’ll probably be 6-9 mos before I can do that. Stay tuned!