Great Startup Ideas, Bad Businesses

What's up, everyone. This is Alex Lieberman, co-founder and Executive Chairman of Morning Brew. Welcome back to Founder’s Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today, I am breaking down two startup ideas that sound great in theory, but are shitty businesses. Let's hop into it. 

2 startup ideas that are great in theory and…less so in practice

So I want to set the stage with this episode. Two days ago I believe, I put out a tweet that very simply read, “What is a startup idea that sounds great in theory, but would be a shitty business?” And sometimes I just put out these prompts. I have no idea what sort of pick-up they'll get, but it's just something I'm thinking about. 1600 likes and 700 responses later, I could tell that people had a lot of things to say about good ideas, bad Businesses. But the reason I was personally so excited about this is that it created so much opportunity for me as just a business builder and a business mind to practice analyzing businesses that people thought were shitty and for my own opinion on them. And so what I want to do is share just a handful of the ideas that folks replied with and then I'm going to pick two of the ideas and go deeper with them. So first we had Patrick Neeman who shared an idea of crowdfunding for musicians and concerts. His view was that this idea of crowdfunding for musicians, great idea in theory, really horrible business. Then there was Kapil Israni who said packaged delivery. There were a bunch of people who also said just food delivery specifically and they referenced how the fixed costs are super high and figuring out the delivery routes is super hard. Umong Dua said a travel recommendation app. He also said basically subscription boxes for anything. His response was “subscription box for X.” So I take that as any sort of subscription box, which I generally agree with, but I do think there are a number of subscription companies that have actually done really well and have really strong economics. Julie Gothier, which I thought this one was hilarious because I've thought of this exact idea in the past, what she shared was a place that allows you to find and rate public bathrooms. Again, I think it's a phenomenal idea, no idea if you could actually make it into a meaningful business. And then there was Nick Bonadio, who said a sports stock market, so basically the ability to go long or go short professional athletes. And then two final ones: Peter Yang said note taking apps in general, which also I pretty much agree with most of the time, unless the functionality is really 10X better, because at the end of the day, most of the notes that I'm taking are on my Mac on literally like the Apple Notes app and it is good enough and it is free. Finally, John Big said an app that connects you with friends when they go out. And I feel like this is the perennial college entrepreneurs startup. A few of my friends started this exact business at Michigan, and I feel like every college every year throughout time has like the thing that tells you where social events are going on at any given time on your campus. So those are some of the ideas. Now let me hop into the two that I find interesting enough to go deeper.

Idea #1: A personal CRM

This first idea was recommended by probably 10 different people, but I want to call out Trace Cohen and KP who recommended the ideas first, and that idea is a personal CRM. So basically the whole idea is that we meet a lot of people in our lives, personally, whether it's at our local dog park or it's on our coed soccer team or professionally that we just meet through LinkedIn or through our network, etcetera. And so there has been a boom of companies that have tried to build technology to effectively better organize the people you talk to in your life and stay on top of keeping those connections warm. And in theory, it makes a ton of sense. Let's just use me as the example. Last week, I spoke to 10 different people professionally, ranging from a conversation with a film director about investing in a documentary about anxiety, all the way to me collaborating with one of the biggest YouTube channels on the planet. Being able to easily search these types of conversations for information from the discussions being bumped by a piece of software that would tell me when to follow up with people, and then also being able to categorize my relationships based on the type of contacts they are and the types of conversations we had, in theory it sounds super helpful. Like that sounds compelling to me because most of these people that I have conversations with I never talk to again. So the question is, why is this a bad business? And to me, the way you answer this question is basically by answering the question of, how badly do people need this? How badly do people need a personal CRM? And so the first way I would try to explore how badly do people need this is saying, would people pay for it? Now me personally, there is some amount of money that I would pay for this, whether it's $2 a month or $4 a month, maybe $10 a month I'm not paying for it. So there is a buyer for this, and I think there's a buyer for generally any business, but I would bet that if you asked me, could you find a hundred thousand people paying a hundred dollars a year, which makes us a $10 million business, how easy would that be? I'd say it wouldn't be easy because I don't think that achieving product-market fit on a product like this would be super easy because I don't know that the need is there and say, you're thinking to yourself. Okay, sure. But let's look at Salesforce. Salesforce is a, you know, Salesforce is a 12-figure business, one of the largest SaaS companies in the world, didn't they effectively just build a CRM? And my argument would be, yeah, sure. In theory, you're comparing a CRM to a CRM, but that is literally the only comparison you can make. It’s complete apples to oranges. Salesforce is a B2B company, so your company is paying with their wallet versus you paying with yours. Salesforce has super sticky revenue because the success of a company sales org that touches revenue is so important to any company. So their propensity to pay for something that increases the odds of their sales org being successful is super high. And the functionality of Salesforce just as software is super robust. Since a sales funnel, all of the types of deals that a sales org could have from a media company to an enterprise SaaS company, it makes in a way more complex business than you or me managing our professional relationships on a personal CRM. So that's how I would answer the question of would people pay for it? Yes. Maybe some, but I don't think a ton and paying B2B versus B2C is a totally different ball game. 

The second question I'd ask myself is how much better is a personal CRM that you or I invented tomorrow, then the free alternative? So one alternative could literally be a spreadsheet, which is what I actually have now. I literally have a spreadsheet that says VIPs and it's basically all of the important conversations I've had over the last few years. In that spreadsheet, I have a column for the name of the person. I log my meetings when they happened. I log the notes from it. And I log when I want to follow up with the person. Is it perfect? No. Do I revisit it all the time or as much as I should? No, but it's free. You also have new tech startups like Airtable or Monday.com that have free or low cost versions. Were they created for the purpose of being personal CRMs? No, but they have most of the functionality that exists because again, the functionality you need to manage your conversations in your personal or professional life is way less complex than a company sales org managing all of your sales conversations. And so the question is, is what would you need to do to create a personal CRM product that is five-X better than all of the free alternatives out there? And to be honest, it's hard for me to think of the functionality that one would need to make it that much better. And then a few other things to think about: What are the unintended consequences of this product? For me,  I think the biggest thing is if I created a personal CRM, if I did not brand this correctly, I could totally get blowback for building a product that basically has people treating their personal or professional relationships transactionally. Two more things to think about before we move on to the next business: At the end of the day, you cannot keep up with all of your connections that you make in your personal life or in your professional life. And so I very much subscribed to the fewer-but-deeper relationships in work or life belief. And so the issue is, is that a personal CRM runs counter to that belief. The whole idea of a personal CRM is that it's basically helping you manage the abundance of relationships that you could have. And so let's just use me as the example again, let's say you extend the example I shared earlier of my last week of meetings. So last week, I had 10 meetings with 10 new people. That means I'm having 520 new connections in a given year. Realistically, how many of those people, even if these are great people, am I going to talk to you again after our first conversation? I think the optimistic answer is maybe 5%, which is 26 of the 520 people. And so if that's the case, how is the personal CRM helping me? With that, organizing your conversations and relationships makes a ton of sense. But unfortunately I think there are enough good free products, not enough functionality differentiation you can make to make it worthwhile to pay for something. And I think it runs counter to what it means to build a few deep relationships. So good idea in theory, but I think it would be a really shitty business to build. 

Idea #2: A two-sided marketplace

Let's move on to the next one. And this one is shitty in a different way. So this is not a single business. This is a type of business, and the type of business is a two-sided marketplace. Now a two-sided marketplace can be a massive business. And so when you think of, what are examples of two-sided marketplaces, you can think of some of the largest businesses in the world. Amazon is a two-sided marketplace between consumer and retailer. YouTube, marketplace between content consumer and content creator. PayPal, you have cardholders and retailers. Uber, drivers and riders. So there is clearly amazing opportunity to be the intermediary or the broker that allows value to be exchanged between two parties that wouldn't be able to exchange that value in the same way or at the same scale if you didn't exist. And you have the ability to basically have a take rate, take some percentage. You can either be taking a percentage of a transaction, let's say if you're Airbnb, or if you're American Express, Or you can have a take rate in the form of advertising real estate that you get to own and make money on if you're YouTube or Facebook. I was actually looking at this before recording the episode. Of the top 10 largest companies in the world, two of them are marketplaces at their core, like that is their primary business. And two more of them, Apple and Microsoft have two-sided marketplaces within their business, mainly in the way of their app stores that you have developers on one side, you have consumers on the other side, and they're taking a percentage of. You know, if you haven't seen the stories about it, Apple takes a 30% take rate on all Apple store purchases and there's been a ton of controversy around this practice. And then something that we haven't talked about yet is how these two-sided marketplaces can scale super quickly because of something called network effects, which you probably have heard of. Hamilton Helmer, who talks about this at length in his book, Seven Powers, basically just defines network effects in a very simple way: For every additional user on a two-sided marketplace, the value of the marketplace to everyone else gets more valuable. And so to give you an example, every time a new content creator joins YouTube, that makes the experience that much better for a consumer of YouTube because now they potentially have even better content that better caters to their needs. So to bring this back, this business is shitty in a very different way than the personal CRM. It is not shitty because there isn’t huge opportunity to build marketplace businesses. On the contrary, there's massive opportunity, but here lies the challenge, and there's three that I want to highlight. The first is what's called the chicken and the egg challenge. What comes first when you're building a marketplace, supply or demand? If you're Airbnb, how do you convince homeowners to list their places if there are no users? And if you're a user, how are you convinced to stay on the platform if there are no homeowners renting their places? That's the chicken and the egg problem. The second is a retention problem, which is how as a two-sided marketplace do you not just acquire people, but also retain either side of the marketplace?

So let's say you're a company like Handy. Handy acts as the intermediary between house cleaners and customers who want their homes to be cleaned. What is going to keep a house cleaner on Handy's platform when Handy's taking a percentage of the sale? And so after the house cleaner builds their own relationship with the home they're servicing, why wouldn't they just exchange phone numbers and go off platform and keep a hundred percent of the revenue? Third challenge: competition. Businesses with network effects are generally winner-take-all markets, which means that finishing second as a two-sided marketplace is generally a recipe for failure. That also means that businesses that want to succeed as a two-sided market have to be early in a space in a space where there isn't already a marketplace that has commanded a large percentage of market share. Generally, these businesses need to raise a shit-ton of money so that they can basically do a land grab for both supply and demand. And third, they need to stay unprofitable for a long period of time because they basically need to pay either in the form of marketing or in the form of scaling to new geographies if say, they're Uber, who were focused really heavily on concentration in specific locales in the early days. 

I want to hear from you

And that is incredibly expensive to do. And so those are the two startup ideas that sound great in theory, but are shitty businesses, but shitty for different reasons. One can be a great business, but it's really, really hard to create a high probability, chance of success.The other is just a shitty business. Now I would love to hear from you, this is a new type of episode that I really haven't done before. It's more focused on startups and analyzing businesses, and it's less about career, which is what kind of the bread and butter of Founder’s Journal has been. I want to hear what you think of it, and I want your honest feedback. Shoot me an email to alex@morningbrew.com and let me know what you think. As always, thank you so much for listening and I'll catch you next episode.