Bad startup ideas
David Peterson

Back in 2010, I was working at Google and dreaming of starting a company. Most days, my friend Saurya and I would stay late to discuss startup ideas while mindlessly volleying a ping pong ball back and forth. We didn’t do much building, but our ping pong game improved tremendously.

I’m sad to say that pretty much all of these ideas were bad. But I think they were bad in useful ways, at least. Let me show you what I mean.

Too small

Many of the ideas were just way too small. As an example, the first idea we had was an alarm clock app. Why did we want to build an alarm clock app? I’m not sure if we even did, to be honest. The iPhone was new. Everyone was building apps. So we just started doing it. And then we kept doing it, because we’d already started doing it. And then all of a sudden, we were alarm clock entrepreneurs building an alarm clock app that I don’t think anybody would have ever downloaded even if we gave it away for free.

This is something that I see all the time. Would-be entrepreneurs want to build something, so they start building the first thing that pops into their heads that is vaguely “on trend” or related to their direct, personal experience. And then they just keep building it, without stopping to think about whether or not they’re building something people want.

Too obvious

The second idea we had was an app that shows you what your friends are doing nearby. This idea is a bit better at first glance, but it’s plagued by another common problem…it was way too obvious.

Remember, we were smack dab in the middle of the “SoLoMo” startup era. Foursquare, the company that perhaps best represented the “social, local, mobile” trend, had just launched at SXSW and raised a massive $20M round from a16z. Uber (an app made newly possible by using your mobile phone’s location) was a year old. Instagram (an app made newly possible by using your mobile phone’s camera) even less. And every recent grad who had just moved to a city and wanted to hang out with their friends had pretty much the exact same idea at the exact same time: what if I could use this handy phone in my pocket to see what my friends are doing nearby?

To be fair to my own idea, just because something is obvious doesn’t mean it’s a bad idea. But the bar is much, much higher. At minimum, you need a credible case for how you’ll win against the hordes of entrepreneurs who are building something similar. That’s hard, but not impossible. Where most of these ideas go astray, however, is they assume that if an idea is “obvious” then people must want it. That’s rarely the case. The startup world is littered with these sorts of “sexy but bad” startup ideas. Rather than starting with an “obvious” idea whose time has clearly come (and assuming that means customer demand will follow), just make something people want. Much easier.

I bring this all up because, similar to the 2010s and the rise of the iPhone, we are currently in the midst of another era of startup ideas all inspired by the sudden emergence of a new technology: LLMs and generative AI.

Almost every founder we talk to these days is building something powered by AI. Many of these founders are talented. But they’re working on ideas that are either too small, too obvious, or both. Lured by the capabilities of LLMs, they’re working on ideas that are “of the moment” rather than building boring solutions that people want to buy.

On the one hand, I get it. New eras in technology are incredibly exciting. I don’t blame anyone for wanting to work in the center of it all. But all I can say is…learn from my bad ideas. And don’t worry if your first idea may be a bit too small or a bit too obvious. That’s all right. Toss it aside. Move on to the next one. And keep going until you find real people with a real problem that you can solve…whether AI is involved or not.

David

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The Problem with Startup Advice
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Looking Back to Move Forward
How to survive this extraordinarily exciting and wildly disconcerting age of generative AI.

LLMs and the Future of Customer-built Software Design
How will LLMs change software development and design?

WORTH READING

ENTERPRISE/TECH NEWS

Bursting the LLM+VC bubble. Sam Hogan, founder of Contextbots, tweeted out a cogent analysis of the challenges of facing the wave of LLM-powered startups. “Companies like Jasper and the VCs that back them are the biggest losers right now. Jasper raised >$100M at a 10-figure valuation for what is essentially a generic, thin wrapper around OpenAI. Their UX and brand are good, but not great, and competition from companies building differentiated products specifically for high-value niches are making it very hard to grow with such a generic product. I’m not sure how this pans out but VC’s will likely lose their money. The other category of losers are the VC-backed teams building at the application layer that raised $250K-25M in Dec — March on the back of the chatbot craze with the expectation that they would be able to sell to later-stage and enterprise companies. These startups typically have products that are more focused than something very generic like Jasper, but still don’t have a real technology moat; the products are easy to copy.” VC Sam Lessin replied that these companies might not fit the seed VC model.

Is the era of the 10x Developer coming to an end? Justin Searles writes that technological shifts are going to fundamentally change the way developers think of their role. “There was a specific, generational moment that attracted a bunch of people like me into the software industry. It occurred during the brief window between home computers becoming widely available and their becoming sealed airtight by platform holders. For a fleeting moment, computers were simultaneously accessible and scrutable during a necessary but temporary stage in the maturation of information technology. Before they were rendered irreducibly complex as consumer devices, merely using a computer required figuring out a lot about how it worked. And coming of age with an understanding how computers worked made programming them far more approachable.”

Competitive tensions spill over. Israeli cloud-native security company Orca sued its largest competitor, Israeli cloud-native security company Wiz, over patent infringement. “Orca’s lawsuit, filed in federal court in Delaware, claims that Wiz “was birthed from the very beginning as a counterfeit copy of Orca’s ideas.” It claims that Orca founder Avi Shua invented cloud monitoring software and says Wiz CEO Assaf Rappaport and his co-founders intentionally copied Orca’s product when they started their company in 2020, a year after Orca’s founding. Rappaport and his co-founders left Microsoft’s security business to found Wiz…In a statement, Wiz spokesperson Tamar Harel said the company was previously unaware of Orca’s “baseless accusations” and lawsuit, and said that Orca “has tried to compete with Wiz on several fronts and failed. Now they are pursuing less innovative methods.”

Can the cloud cope? The WSJ questioned whether or not the cloud hyperscalers can actually handle the volume of demand for cloud-based LLM infrastructure. “much of the infrastructure wasn’t built for running such large and complex systems. Cloud sold itself as a convenient replacement for on-premise servers that could easily scale up and down capacity with a pay-as-you-go pricing model. Much of today’s cloud footprint consists of servers designed to run multiple workloads at the same time that leverage general-purpose CPU chips. A minority of it, according to analysts, runs on chips optimized for AI, such as GPUs and servers designed to function in collaborative clusters to support bigger workloads, including large AI models.”

Is the IPO window opening? Just maybe, and Jamin Ball has some thoughts on the metrics that might be required to squeeze through it. “I went back and looked at the last ~6 years of data on software IPOs to answer the question “what does it take to go public?” I looked at 3 key metrics: LTM Revenue, Revenue Growth and LTM FCF Margins. Here are the median stats for a set of ~50 software IPOs from 2018 to today. This can also act as a guide for younger startups who have ambitions to go public one day (these should be your goals). (1) Median LTM Revenue: $198M; (2) Median Quarterly YoY Growth Rate: 49% (this is the revenue in the most recent quarter before IPO compared to the quarterly revenue 1 year prior); (3) Median Net New ARR added in IPO Quarter: $22M; (4) Median FCF Margin: -11%.”

The M&A market seems to be showing signs of life according to this analysis by Itay Sagie (which breaks out numbers in the US, Europe, and Israel) and this report in The Information. Sagie, “calculated the revenue multipliers over the past eight quarters, leveraging Crunchbase data and examining disclosed M&A prices and revenue, which is available only for a portion of the deals. The results reveal a decline, with revenue multipliers eventually stabilizing around 5x. It is noticeable that revenue multipliers in Israel tend to be higher than other regions, as it is an attractive destination for global investors seeking innovative deep tech companies.” The Information reports that, “after more than a year of stalled merger and acquisition activity, the deals market is showing signs of life. Bankers, lawyers and private equity dealmakers say they’ve had more discussions about potential acquisitions in the past several weeks than in the past year. And “it’s not just kicking tires,” said Brian McPeake, co-chair of law firm Goodwin Procter’s private equity practice. Formal, banker-led corporate auctions are back after a period when many deal conversations involved a single buyer and seller, he said. While the number and value of announced deals remains down from this time last year, the total value for the second quarter was up 23% from the first quarter, according to data from Dealogic.”

HOW TO STARTUP

No such thing as Series A metrics. This was always true, but it’s especially true now, according to this pair of blog posts by Charlie Hudson and Tomasz Tunguz. Charlie writes that “startup company is more than just a bundle of KPIs and numbers,” and that focusing to heavily on KPIs that external investors want to see can be counterproductive: “If you ask an investor what metrics they want to see at Series A, they will likely be able to tell you what would make you competitive in the pool of opportunities they see. Still, they likely cannot tell you what metrics your specific company needs to hit. I don’t think most investors know what they want to see in a potential investment until they see it.” Tomasz backs up this observation with a bit of data, but also makes a critical point: “The fundraising market is still understanding what steady state growth is. Two years ago, top quartile growth was projecting 4–5x growth from $1m in ARR. Today, is it 2x or 3x? With so much change in the buyer behavior within the last two quarters of 2023, it’s hard to say, further widening the Series A variance. In my view, the most important metric across rounds isn’t ARR but pipeline predictability. Companies with great pipeline-to-quota ratios & stable sales cycles can forecast more accurately than the rest.”

HOW TO VENTURE

Fred Wilson just called the bottom. The OG of VC blogging seems to have just called the bottom on the tech/VC downturn: “Now that the NASDAQ has posted a couple of strong quarters, I would expect venture capital to respond. But it won’t happen overnight. We are in the summer doldrums. It takes time for VCs to raise new funds. And deals take months to come together. So my guess is we are mostly through this downturn. We will know for sure in a couple of quarters.”

Breaking news: there are too many VCs. Vice makes the case that VCs face an existential threat. “A growing cadre of VCs, some very young and with little to no genuine professional experience, descended onto the scene, sometimes irking the established class. “A serial founder who’s built multiple businesses in the past, like, why the hell are they taking advice from a 21-year-old?” one such VC mused to me. Nevertheless, graduates from top colleges, after decades of walking straight off the stage and into McKinsey HQ, dreamed of life as a member of the All-In podcast. Every single former FAANG employee seemed to be an angel investor. Interest in the profession was so high that thousands of young people joined a “global collective” of angel investors and “aspiring VCs” called — what else? — “Gen Z VCs.” Even founders, typically focused on keeping their own startups afloat, created venture side projects….But now, as a result of going all in during the 2010s, “LPs are way over allocated to venture,” said Albert Wenger of Union Square Ventures, reflecting the thoughts of others. With interest rates up, some VCs have started to believe their money men and women will pull back and otherwise look elsewhere. “It’s going to give somewhere,” said Wenger. And when it does, many VC firms will start to face the same pain that their tech startups have already endured for years as their profession downsizes to adjust to the new normal after years of stacking other people’s chips and pocketing a cut whatever the results. “The retrenchment is happening,” said the venture capitalist Eghosa Omoigui. “It’s definitely happening.””

PORTFOLIO NEWS

Candu’s CEO, Jonathan Anderson, broke down exactly how OpenAI effectively onboards 1.5B users.

Aquant’s CEO, Shahar Chen, shared what an AI app store means for vertical AI developers. “Just as the introduction of the iPhone and its App Store transformed the mobile industry, an AI app store has the potential to reshape how AI is accessed, applied, and monetized, fostering innovation and empowering users to harness the full capabilities of AI technology.”