Key Igniting Observations
TL;DR: Business ideas are overrated. Observations are underrated. Iconic entrepreneurs seem to be very good at making observations, rather than coming up with fabulous ideas.
A few days ago Paul Graham published a blogpost on how to get “startup ideas”. In the text he points out how startup ideas don’t just happen, and elaborates on the process of ideation (mostly looking at tips and tricks for coming up with “startup ideas” on demand). I read through it and immediately thought “hmm... I’m pretty sure it’s not entirely about that”. I’m not saying he’s wrong, what I mean to say is that a business idea is not the real starting point for the entrepreneurial thinking process. There is another, more relevant, point in time we keep missing: the key igniting observation, the central insight that detonates the founder’s creative activity.
Most great entrepreneurs don't necessarily have "great ideas", they just make excellent observations.
I’d like to pretend this is something I’ve been doing for a while with my founders at 500 Startups and Mexican.VC, but truth be told, the concept hit me fairly recently. I noticed how interesting it was after mentoring in a few Startup Weekend events; in them (and outside, too) I listen to pitches time and time again, and have realized most entrepreneurs make a common simple mistake: they are way too invested in their business idea. When they sell them to me so enthusiastically, the only thing they trigger in my head goes along the lines of “that’s a very cool story bro!”.
However, I noticed that the conversation consistently improved when we moved on to the next question: “Why are you building this?”. There’s a great TED Talk by Simon Sinek in which he explains how people, and specifically early adopters, do not buy products because of what they are or how they’re made. Most people buy them because they believe in the reason of their existence. They’ll buy the why. If this is true for early consumers, it’s even more for smart investors.
I’ve noticed in the entrepreneurial world most are asking “what is your startup idea?”, as if this was the root of all innovation. I think this is mostly due to the fact that people think an entrepreneur, by definition, is an individual with some very smart ideas, which in turn explain his or her eventual success. So following that line, it’s all about those ideas (idea being defined as a solution to a well defined problem). Even a higher echelon of sophistication, in which the execution of said idea is what matters, people think of it as the starting point.
The generalized belief is wrong, and needs to change for fundamental reasons. Most great entrepreneurs don't necessarily have "great ideas", they just make excellent observations. Specifically they have a genius one that triggers everything else: that’s what I’m calling “key igniting observation”, an insight or diagnose (NOT a solution) for some undesirable situation.
A clear example of this is how Sir Richard Branson came up with the idea of creating Virgin Airways. One fine day he heard that “if you expressed serious interest in buying an island, then the local estate agent would put you up for nothing in a grand villa and fly you all around the Virgin Island by helicopter”. So following the if you do A, then B happens logic, he disingenuously called and said he wanted to buy the island. They gave him his helicopter ride and once there, figured out he didn’t have any intentions of buying it, so he eventually made his way back to a larger island where flights to Puerto Rico departed.
When he got there, they announced a cancellation, leaving him stranded. Sir Branson looked around at the crowded waiting area and realized how many people were going through the exact same inconvenience. So, he decided to go get a phone book and find out how much it was to rent a charter. He made some simple math involving the number of people in the room and the price for the service and decided to give it a go. Next, he borrowed a blackboard and walked around the airport with an announcement that said “Virgin Airways single flight to Puerto Rico 39 dollars”. He made money and the plane wasn’t even his... so he concluded that he could make even more money if it was. That was his key igniting observation, the one that gave way to the start of Virgin Airways.
So get this: a specific chain of events led him to conclude that he was standing in front of a really good opportunity, he didn’t just wake up one day and hollered in the shower “an airline must be a great business!”.
The point being that what most people call “startup ideas”, understood as the fundamental unit for a business and what gets the ball rolling, don’t really exist. What’s in their place is an insight, which we consistently underestimate in our search for “good ideas”
Successful entrepreneurs usually mention their central observations; Sandy Lerner, the founder of Cisco pointed out how they never thought about creating Cisco, they simply noticed that the world was about to experience a serious shortage of routers due to the increasing role of networking in computing. Elon Musk made quite an groundbreaking observation: the world is coming to an end... therefore, there is a clear need for ways to get humans to other planets, that’s why he created SpaceX. The first thing he achieved was putting a spaceship in orbit. Then, this year SpaceX made the first private provisioning trip to the International Space Station. He plans to get people to Mars by 2030. I'm pretty sure he doesn't have much more of a plan after that, but I’m certain that he's taking steps in the right direction, putting himself in a much better position than anyone else to achieve his long-term mission.
Google’s approach is completely different from the original PageRank, but the core observation still drives most efforts within the company: bringing relevance to data in a world where relevance is defined by context more than content.
The case is no different for entrepreneurs in the software world. Sergey Brin and Larry Page, founders of Google, noticed that pages in search engines were sorted out based on poor metrics such as the repetition of relevant words in a given article. Additionally, they noticed that the amount of information created every day was increasing rapidly, making the flaw even more dramatic. So they decided to try out different algorithms, the first successful one being PageRank. Nowadays Google’s approach is completely different from the original PageRank, but the core observation still drives most efforts within the company: bringing relevance to data in a world where relevance is defined by context more than content.
In all the examples mentioned above, from Richard Branson to Larry and Sergei, one thing remains true: the final result rarely resembles the initial business idea, nonetheless it remains faithful to the key igniting observation.
The abilities to make this kind of observations are not present in everyone, more so, the skill needed to look at a present reality and feel enough frustration to want to change it is also not very common. All this to say that vision also derives from insights, it is the ability to see the future in the clearest possible way. All these put together with some transformative will, mark the difference between the passive observer and the entrepreneur. The passive observer looks at traffic and thinks “Damn, so many cars, this is a real issue”, meanwhile the entrepreneur can envision streets without traffic, and she can do it so clearly that the idea of traffic becomes unbearable to the point in which living through it is not an option.
Mine and David’s key igniting observation was that there was a disproportionate relation between the amount of startups created in Mexico and those actually raising seed capital. This insight lead to the creation of Mexican.VC, even though no one in the founding team really knew how to create a venture capital firm. Such observation was enough to get the ball rolling; everything else we learned in the process. Now, after having observed the situation long enough, I can no longer bear to live in a country without loads of entrepreneurs driving change in the economy; the same way that Steve Jobs could not live in a world where millions of regular folks didn’t have access to desktop publishing.
As a founder, key igniting observations are crucial, since they become the compass in both easy and rough times, they are at the business core and work as an axis for any pivots.
As investors, we must remember that ideas are secondary to observations. So I commend everyone to ask founders about the insights, since those are the ones that allow a startup to keep moving in time, to iterate, to transcend uncertainty. Observations usually remain relevant even when the initial business idea fails; and it will.