Founder's Guide: Finding the Right Idea

There's a saying in Silicon Valley: first time founders focus on product, second time founders focus on distribution.

When thinking about companies, most people value the things that the company creates. Google Search. CocaCola. Marvel Movies. So it makes sense that when people think about starting a company, the first thing they turn to is 'what can I create that doesn't exist in the market, that provides novel value?' In my opinion, this is a really bad way to come up with an idea for a successful company.

Trying to build a brand new product is how you get a research lab. And some research labs obviously become very successful companies -- OpenAI comes to mind. But the vast majority of research labs masquerading as companies fail, because they never even get their product off the ground. Research is hard! It's unpredictable, there is no way to guarantee timelines or deadlines, and its very easy to throw money into a pit without any guaranteed returns. Companies are already really likely to fail. Why would you add the ambiguity of hard research into the mix? “Yes, I'm going to build this plane while I'm flying it, but also I'm going to set it on fire first” GOOD PLAN.

Instead of looking for things that don't exist, it is much smarter to look for things that already exist, that only you or a small group of people know about. And in particular, you should be looking to minimize what I call the knowledge ratio -- that is, the ratio of 'people who think this is easy to build' / 'people for whom this would be really valuable'.

An example.

A friend of mine recently started a company that sells an AI detector. Basically, you put in a bit of text, and the service will tell you how likely it is that that text was AI generated. If you don't work in AI, this may sound like a really hard problem. Maybe even impossible. Generative AI is pretty good these days, and there's constantly stories about teachers trying to detect AI on students essays and failing, and you personally have likely seen a bunch of examples of things that you couldn't be sure were AI generated. Being able to accurately detect AI generated text probably sounds like a superpower to the vast majority of people. I work in AI and have for about a decade -- I think this is a two week project for an AI engineer, at most.

An idiot might think that's an insult. It's not. It is an incredibly high compliment. What my friend is doing here is really smart. He's identified something that is immensely valuable, that was trivially obvious for him to build. And he spends almost no time building it. Instead he can just sell. He sells superpowers to people who think that this service is magic, and only a handful of people know that it's like two weeks of work for him to create.

Note that I am NOT saying that anyone in the world can create an AI detector. Rather, I'm saying that anyone who is in AI should know that building an AI detector is pretty straightforward.

The general term for the mismatch between specialized knowledge and global market understanding is what I call 'information arbitrage'. It's incredibly apparent in the AI world right now. There are maybe 10000 people in the world who know enough about AI to create something of value. Approximately half of them are at Google, a bunch at OpenAI. Some anons on Discord maybe. There are billions of people for whom AI is literally magic, and even the most basic AI services could be life changing. The knowledge ratio for most things in AI right now is really small! Great time to be building a company in AI.

I'm sure the economists in the room are objecting. If something is really easy to build AND provides a lot of value, why would it not already be done? Surely there would be a lot of competition in this space from those 10000 people? Nope, get that efficient market hypothesis bullshit out of here. The problem with efficient markets is that they only work when everyone has all of the relevant information. Here, the players are blinded by their own knowledge of what's obvious -- they don't even realize that the things that they take for granted are hard / magical to a large number of other people. This is of course naturally exacerbated by some very strong network bubbles.

I'm reminded of this famous comment on hackernews when Dropbox was launched.

Of course, Dropbox went on to become a multi-billion dollar company. Drew Houston and anon both knew how to build the tech. They both knew that it was trivial. But what Drew knew that anon didn't, was that there were a lot of OTHER people that didn't have the first clue of what an FTP server even was, who would obviously benefit from having one.

So how do you find a good idea? Get out of your filter bubble and start seeing the water. Look for tools that you take for granted that are so obvious that you and everyone around you ignores them. And then see if other people outside your bubble would find them useful.

This maybe sounds like two steps of equal difficulty, but they are not. It is almost tautologically difficult to consciously realize what is obvious to you. One strategy that has worked for me in the past is to talk to someone who knows nothing about my field, my work, my life and just walk them through a day-in-my-shoes in a ton of detail. Keep note of what they find surprising.

Once you've found your 'something obvious', the second step is trivial: almost everything that is obvious to you is valuable to someone else who just doesn't know about it. After all, it's already providing value to at least one group. In case you need an intuition pump, this is basically how a lot of SaaS companies work -- they take something that already exists (sometimes something as trivial as a python library!) and is pretty straightforward for a specialist to use, and turn it into something that is easy for a nonspecialist to use.

Now, I'm not saying that trying to bring something new into the market is doomed to fail, or that this is the only way to have a successful startup. There are a lot of reasons for why people start companies -- many people actually want to start companies BECAUSE they can work on something really totally new. But if your goal is first and foremost to build a successful business, the best way to do that is not by creating something brand new. It's by taking a product that you already know 'works', and focusing entirely on how to get it into a new market that you can dominate.