7 Responses

Griffin

June 2nd, 2010 at 4:57 pm

This sounds like an incredibly narrow view for judging a startup to be successful.

Also, this is the same Marc from Ning correct?

- Griffin

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Brian Armstrong

June 2nd, 2010 at 8:29 pm

Haha…valid point. Ning isn’t doing so hot lately.

I actually think 10x is a bit high as well – perhaps as a long term view a new tech should have the potential to be 10x, but in the early stages something like 2x is more reasonable.

But a 10% or 20% improvement is what a lot of businesses are trying and think that’s a mistake – or at least it won’t be huge (which is what VC’s want to invest in). It’s tough to take down an incumbent by being only 10% or 20% better. I think you need at least 200%. On that point I agree with him.

Perhaps for some being huge isn’t the goal (which is fair), but if it is then I think his point is valid.

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Griffin

June 2nd, 2010 at 9:31 pm

I would go further and say that if having an liquidity event is the goal, then his point is valid.

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Chuck Cohn

June 2nd, 2010 at 7:45 pm

Brian,

I completely disagree that this should be true from an entrepreneur’s perspective. Mark Andreesen is a venture capitalist investing in early stage tech companies. In his case, if he can’t get a massive return, it isn’t worth investing in. And the truly transformational technologies (a “10x improvement” companies) often offer the ability to get this sort of return. Given the failure rates of these sort of ventures, the winners need to get a 10x to get the sort of risk adjusted return that the limited partners in his fund will expect and demand. As a VC, Mark has the benefit of diversification across many investments.

What about from an entrepreneur’s perspective? What if you have something that is better than the current product in a meaningful (but not disruptive or transformational) way – should you not pursue it? Think about almost all medium-sized non-tech companies. How many of these are really 10x better? Very very few of them but many have created great businesses.

I think that your product or service needs to be better to make it worth pursuing, but it doesn’t necessarily have to be transformational. I wish more people were entrepreneurs in our country (as I know you do) – there are millions of businesses that aren’t started every year that would be viable, profitable businesses that never are because people assume that since their idea isn’t transformation it shouldn’t be started. These businesses, though, are the ones that usually require the least amount of capital and have the highest likelihood of success.

- Chuck

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Brian Armstrong

June 2nd, 2010 at 8:46 pm

Totally agree – for a VC it has to be 10x. To have a nice niche business you don’t.

Also, yur right that a medium size company is hardly ever a 10x over a competitor – they are in constant competition for a 10% or 20% edge over the next guy. But to START a new business and take down an incumbent, I think you do need to be much better – not just a little bit.

An example would be entering the operating system business. If you came out with an operating system that was 10% or 20% better than Windows or Mac, I think you’d still have no chance because the big guys have such a leg up on distribution, mind share, existing software, etc. The switching cost for consumers is too high if it’s only 20% better, esp in a market like that with high barriers to entry.

A counter-example might be cloud computing. Also high barriers to entry – but Bezos saw that long term it would probably have a 10x improvement over do-it-yourself hosting of the day, so he invested early to be in a position to take advantage of that 10 years later. And eventually, it was worth switching – or at least using it for your next project.

Anyway – I think we basically agree. There are lots of good businesses that can get started with a small improvement, I just think they will never be huge and will constantly live in another companies shadow. The Pepsi to Coke. The Avis to Hertz. Or the Firefox to Internet Explorer (shudder).

Part of it too is a personal shift in focus – I’m trying to think bigger and longer term lately. My projects to date have been “playing it safe” in some sense with relatively minor improvements. So at some point I’d like to define or dominate a category – something that is probably much harder but I think would be cool. It is more of a personal goal though, so I should probably be careful about characterizing it as good for everyone.

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