Economic potential energy
The slogan of YCombinator is "make something people want". I think that last word "want" is very important.
Psychologists distinguish between "wanting" and "liking". You like meditating, but you want a cigarette. You like writing in your journal, but you want to watch TV. You like having coffee with your friends, but you want to keep browsing Facebook.
I can't say that people only do what they want and not what they like. That would be too extreme; sometimes they do turn off the TV and open up their journal. But you also can't ignore the fact that people struggle to do what they like when it's not also what they want.
To be clear, I'm no exception. There are a lot of things that I know I should do. Things that would provide me with tremendous value if I did them. But nevertheless, I still have trouble bringing myself to do them. And I know I'm not alone.
It's also important to distinguish what people want from what brings people value. Broccoli brings people value, but pizza is what they want.
As you can probably tell from the examples, it's really important for a company to make something that people actually want. Pizza is a better business than broccoli. Cigarettes are a better business than meditation classes. It seems obvious, but enough people make the mistake that YCombinator feels that it's the best four-word advice to a startup.
I've made the mistake myself. I tend to focus on value and liking over wanting, and I think it played a big role in why my first two startups failed.
My first startup was called College Inside View. The idea behind it was that student reviews of colleges aren't detailed enough. They address broad questions like "What are the academics like?", but I wanted to address a whole bunch of specific questions like "Are the professors in the neuroscience department approachable?" and "Is it hard to find a good pick-up soccer game?". I figured that since college is such an important decision, such information would provide a ton of value to prospective students. Maybe it does. Either way, it turns out that they just don't want it enough.
My second startup is called Premium Poker Tools. It's still up and running, but only makes about $200/month. Poker players use it to do number crunching when they study. Similar apps did already exist, but they're all crusty and old. I wanted to provide something more modern, intuitive, and powerful. Users have told me that I've succeeded in doing that, but it turns out that there just aren't enough of these users out there. The market is too small.
You see, when I started Premium Poker Tools I figured that it was at least a $10M+ market. Hopefully more like $100M. There are a lot of at-least-somewhat-serious poker players in the world, and according to the books and articles I've read, they all should be using some sort of software like PPT to study. I know that not all of them will do that, but even if a decent chunk of them did, it'd still be a big market.
It turns out that it's only a miniscule chunk, and that it's a really small market. I remember when I gave a presentation at a poker meetup once and asked the audience how many of them have used poker software to study over the past month. Only one or two people raised their hands. I also should have been tipped off by the fact that my competitors were all one-person-shops, not bigger companies.
What explains why the market is so small? Simple: wanting vs value. The software does provide good value, but people are lazy and they don't actually want it.
I started a podcast about startups recently. So far I've done three interviews, and I made it a point to interview founders who have companies that I really like. I'm biased towards companies that provide liking and value (meditation, broccoli), and it turns out that all three founders have what I'd call "value companies". They're all successful companies so clearly they are also providing something that people want, but I believe that each of them could be many times bigger if more people... well... wanted the right things.
The first company is called Relationship Hero. If you're having some difficulty with your significant other, you can hop on a call with a coach from Relationship Hero for about $100 and get the help you need. I think that's an incredible value. Why? Well, happiness research has found that close relationships are one of the most important determinants of your happiness. But I'm sure you didn't need a bunch of PhD's to tell you that. It's pretty obvious. So then, that $100 is buying you a lot of happiness.
And there's a lot of people in the world who have difficulties in their relationships. In other words, there's a huge market. Divorce rates are ~50% in America for starters, but even in successful relationships things are never perfect. So then, why isn't this company a unicorn? My answer is that there's a large mismatch between value and wanting.
The second company is called Beeminder. We've been talking this whole time about how difficult it is to actually do the things you know you should do. Getting coffee with your friends instead of browsing Facebook, writing in your journal instead of watching TV, etc. Well, Beeminder solves that problem.
Here's how it works. You tell Beeminder "I'm going to journal 4x/week". Then every day you journal, you enter it in to Beeminder. If you fail to journal 4x/week, you have to pay them $5 the first time you derail. Then $10 the next time, $30 the following time, etc. The idea is that when actual money is on the line, you think "Oh shit, I don't want to have to pay them, I'm gonna make sure I find time to journal today". And they didn't just come up with the idea randomly. It's based on a lot of science.
I use Beeminder myself and have a hard time thinking of a product that I find more valuable. But why don't more people use it? Why isn't it a unicorn? Everyone has trouble with akrasia, so the market should be huge. And akrasia is a super valuable problem to solve, so people should be willing to pay a good chunk of money to solve it. Again, I think the issue is one of wanting vs value. The reason why it isn't a unicorn is because people don't want the right things.
The last company is called SomeWordsForMe. Here's the idea. Journaling is super valuable, but it can be hard to bring yourself to do it. If you sign up for SomeWordsForMe, you'll receive emails with journaling prompts. Eg. "What worked out well for you today?" When you reply to the email, it saves it as your journal entry. You can also use text messages instead of emails. People are already spending a lot of time emailing and texting, so perhaps this is the nudge they'll need to journal more often.
I love the idea. Whenever I journal I find that it's one of the most productive and beneficial things that I can do. I agree with Blaise Pascal when he said:
All of humanity's problems stem from man's inability to sit quietly in a room alone.
But nevertheless, I always find it difficult to actually sit down and journal.
I know I'm not alone here. I'd argue that basically everyone would benefit a lot from journaling. And of the people who recognize this, most of them have trouble bringing themself to do it. So, like the previous two companies, I see a huge addressable market, and a ton of value being provided, but I think that wanting vs value is why the company isn't a unicorn.
We've talked about how fatal it can be to provide value or liking without also providing wanting. Let's say you find yourself in this fatal situation where you're providing the former without the latter. Take SomeWordsForMe. The company only has a few users actually, so it's far, far away from being a unicorn. But what about the fact that it's providing so much value? Does that mean nothing???
I don't think so. I think it means something. And I think that potential energy is a great analogy for what it means.
Think about a ball on top of a mountain:
It's just sitting there, so it doesn't have any kinetic energy. But since it's so high up, it does have a lot of potential energy. It has the potential to be rolling really fast. If only someone would just reach over and give it a nudge.
In the picture above, the summit of the mountain is pretty narrow, so it only takes a small nudge to get it to roll down and convert of all that potential energy to kinetic energy.
But what if the summit were wider? Well, then it'd take a larger nudge.
I like to think of the size of the summit as the activation energy. Remember your old chemistry classes? Activation energy is the "nudge" it takes to get a chemical reaction to occur.
The reactants start off with a lot of potential energy and "want" react. They "want" to move from the state of high PE to low PE. They just need the nudge to get there.
Ok, let's come back down to reality now. How is this analogous to startups?
Well, kinetic energy is analogous to profit. Profit is what you're ultimately after.
Potential energy is analogous to, well, the potential to make profit. If you're selling pens, there just isn't much potential. Pens don't provide enough value. But if you're selling something like SomeWordsForMe, the value is there, so I think there's much more potential.
But potential means nothing in isolation. You have to get past the activation energy for that potential to be realized. Here, I think the activation energy is the energy required to move from value to wanting. To get people to want the right things, as well as other customer acquisition stuff.
And to take things a step further, in practice, the mountain has "levels":
You don't just go straight from the summit to the ground. You go down to level one first. And then from there, the game has just begun. From level one you have to get to level two, and for that, there's a new activation energy to overcome. Etc, etc.
It'd be interesting to draw out a "mountain chart" instead of a business plan.
This blog post was driven by me thinking "but there's something there!", and not being articulate what that "something" is. So far I've described that something as "value" or "liking". The assumption being that a product that truly provides value has a lot of potential, and it's just a matter of overcoming the activation energy of getting people to "see the vision".
The analogy purposefully implies that the "natural state", like in physics, is the one where the potential energy has been "expended". That it's "natural" for value and liking to win out in the long run.
Maybe I'm not being cynical enough though. Bad equillibriums are a thing. Maybe value isn't as important as I'm making it out to be. Maybe a better way to win is to sell cigarettes, metaphorically. Or maybe it's to just win the social proof game, or the network effects game.
I'm not sure what to think of all this yet. Maybe I'll explore it in a different post. For now I just want to point out that there are different sources of potential energy.
Think about physics. A loaded spring has potential energy from the fact that the spring is loaded, whereas for the ball on top of the mountain, gravity is the source of potential energy.
Same thing in startups. One source of potential energy might be the value that a product provides, but it's not the only one. Virality is an example of another source. If there is a high viral coefficient, it only takes a small push to get the ball rolling and to get that famous L curve (similar to what we've seen with the coronavirus).
What are the practical implications of all this? Have I said anything novel? Is any of this going to help you have more success as a startup founder?
I doubt I've said anything truly novel, but I think that the terminology and analogy of potential energy is useful. I know that for me, when there's a good term or analogy to describe something, it sticks better. The example that comes to my mind is cached thoughts. Having a label for them and understanding how they're analogous to a computer cache just immediately made the concept stick for me. Hopefully the potential energy analogy will do something similar here for you.
Another practical implication that I think is important is how to interpret the results of experiments. You see, as a startup founder you're always running experiments. A startup itself can be thought of as an experiment. You have a hypothesis, you test it, you interpret the results, and then you do it all over again.
Think back to activation energy though. Activation energy is all-or-nothing. You could reach 90% of the activation energy and the result of the experiment will look the same as it would if you reached 15% of the activation energy. In both cases, the result will just be failure.
But even though the results look the same, they mean two totally different things. In the latter case maybe it's implausible to get the reaction to occur and you should quit. But in the former, maybe you want to spend more time figuring out how to provide a stronger nudge.
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