Assumption-driven Entrepreneurship: Your Hidden Sustainable Competitive Advantage

Thesis-driven investment is the process of making investments based on theories about the future. The basic process is as follows

1. Make a prediction about the future based on economic, legal, technological, and social trends.
2. Figure out ways to create value based on the differences between the world today and the predicted future.
3. Invest in companies aligned with said world-view.

Having a better understanding of the future than everyone else is a great reason to invest. It's also a really lousy reason to start a company.

Don't believe me? Ten years ago I bet you could've told me that most people today would get their news online. Almost anyone could have told you this. Except of course for the newspaper owners themselves.

So why didn't you create Digg?

Don't get me wrong, a solid thesis is certainly non-trivial. But its importance is dwarfed by another less tangible factor.

Our understanding of human nature.

How does understanding influence our design decisions? Allow me to explain through example. Below is a list of three assumptions about human nature. See if you can figure out which startup(s) they go with.

• Web traffic is constant. Your website has the same number of viewers on Monday morning as on Sunday afternoon. So the best way to decide which stories are the best is to divide the number of votes by the time elapsed.
• The way people network in real life is as follows. The more networked person gives their entire rolodex to the less networked person and says, "have at it!" We should design our business networking websites to reflect this reality.
• Most couples meet in bars. When you are walking down the street and you see a couple holding hands, there's like a 98% chance they met in a bar. Because bars are so effective for meeting new people, our online dating sites should mirror the social atmosphere of a bar.

The problem with assumptions is that they're usually correct. For certain people, at a certain times, in certain places.

The danger isn't that you'll sometimes be wrong. The danger is that you'll always be right.

That is, your assumptions about human nature will be true, but less useful than those of your competitors.

Consider online video. Five years ago anyone could have told you that online video was going to be big. The truth of the thesis was self-evident. But it took Chad Hurley to figure out the money was in the half-hour after lunch when employees were too comatose work. YouTube didn't make it big by having a better thesis, but rather by having a better understanding of human nature.

This is why thesis-driven investment works for venture capitalists but not for entrepreneurs. For VCs, merely having the best thesis is good enough. After all, they get to look at every solution to a given problem and evaluate each on a binary basis. All the assumptions are built in, and the product either works or it doesn't. If you saw a prototype of Digg then you'd have probably been smart enough to invest. Or maybe not. But at least the decision-making process involved is relatively straight forward.

Compare this to actually solving problems. You don't get to choose your solution from a list. You need to solve it yourself.

All too often people start businesses after finding a cool new problem. Bad idea, because being the first to find a problem confers zero advantage. None.

Think about it. Now you have two problems instead of one. First you have to convince others that there is a problem. Then you have to solve it. In practice so much of your time is spent on the former that you're lucky if you even get to the latter. And even if you do, you're just as unlikely to be successful as everyone else.

But what do you do if you REALLY REALLY know what the future is going to look like. If you've found all the cool new problems. The ways to create value. The areas for innovation. What then?

Go have a beer and let someone else work on it.

Much better to wait until you've discovered something new about human nature. Something that makes your assumptions more accurate for more people, more of the time, in more places. Something more useful. Something more actionable.

Call it assumption-driven entrepreneurship.

The best part is that theories are invisible so they can't easily be found and copied. Your theory of human nature is your hidden sustainable competitive advantage. Make sure you have one. And use it wisely.

Comments

[sharpshoot]

Alex, absolutely great blog post. You are so right about thinking of services which take advantage of human nature. Indeed the most successful services will be those which augment the advantages of the web in bringing people together with our understanding of human nature. Spot on here.

[JohnN]

driveb by human nature ay? sounds a bit like maslow's triangle check it out.

[Bill Burnham]

It's much easier to filter for ideas that pattern match to a thesis than it is to actually come up with the ideas the successfully exploit a high-level thesis. While there are some great examples of entrepreneurs doing this (Jeff Bezos at Amazon, Bo Shao at Eachnet) it seems like the key ingredient in many of the most successful ideas is personal passion. If an entrepreneur is passionate about their idea and willing to sacrifice to turn it into a reality that often gives them the greatest chance of success.

[Dave]

hmm... thoughtful post, tho not sure i'd agree.

* it's true that identifying a problem doesn't mean you've got the right angle on solving it, but you're more likely than someone else who doesn't know the problem exists.

* it's also true that being first to tackle the solution doesn't mean you'll get it right, however due to the crappy odds of entrepreneurship that's pretty much true at ANY point -- this thinking would lead to ALWAYS choosing to have a beer over building a better mousetrap, and while perhaps a better strategy for enjoying life, i wouldn't propose that as a good strategy for entrepreneurs.

in summary, the things i take away from your post are:
- just because you recognize a problem (first or not), doesn't mean your solution (first or not) is going to be a good one, the best one, or a workable one.
- sometimes observing human nature can be very helpful as to how to solve problems, and entrepreneurs might want to consider how to apply these observations to their business.

however, i'd also add:
- starting a business based on a problem you've experienced personally IS a good way to choose where to apply yourself. it gives you a very direct sense of which solutions work and which don't. but you probably also want to check your subjective perspective against those of others, and try to solve for a larger audience.

anyway, thanks for inspiring a conversation on this topic. it's a good one.

- dave mcclure
http://500hats.typepad.com/

[Bootstrap business]

Good read! Indeed, many entrepreneurships and business are born out of thinking problems and providing solutions for them. However, as in the business world, the succesful entrepreneur always comes up with the best solution to the problem. And a little luck as well.