Ago Lajko



Startup narratives

October 2021 There are few widely accepted narratives and stories in the startup world, and besides specific areas like SaaS companies are often very diverse with limited overlap. However it’s obviously clear that having a good intuition for ideas matters a lot for starting a company. Perhaps Thiel is the person who most embodies the essence of this theory. Being a contrarian and having a key secret is outlined well in Zero to One:

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today:

1. Make incremental advances. Grand visions inflated the bubble, so they should not be indulged. Anyone who claims to be able to do something great is suspect, and anyone who wants to change the world should be more humble. Small, incremental steps are the only safe path forward.

2. Stay lean and flexible. All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.

3. Improve on the competition. Don’t try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors.

4. Focus on product, not sales. If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth.

And yet the opposite principles are probably more correct:

1. It is better to risk boldness than triviality.

2. A bad plan is better than no plan.

3. Competitive markets destroy profits.

4. Sales matters just as much as product.

Reading the PayPal founding story from Jessica Livingston’s Founders at Work makes me appreciate how Max Levchin and Peter Thiel, the two co-founders had to iterate through a number of ideas before they finally found product market fit. As Max Levchin puts it:

I think we didn't know what we were doing. I think the hallmark of a really good entrepreneur is that you're not really going to build one specific company. The goal—at least the way I think about entrepreneurship—is you realize one day that you can't really work for anyone else. You have to start your own thing. It almost doesn't matter what that thing is. We had six different business plan changes, and then the last one was PayPal. If that one didn't work out, if we still had the money and the people, obviously we would not have given up. We would have iterated on the business model and done something else. I don't think there was ever any clarity as to who we were until we knew it was working. By then, we'd figured out our PR pitch and told everyone what we do and who we are.

What is striking here is that the two narratives (Thiel’s prescriptive thoughts of how a company ought to be started and Levchin’s descriptive thoughts of how things happened for them) don’t align well. The mismatch is striking. On one hand Levchin is highlighting how they iterated over a number of ideas until something stuck. All the while Thiel is advocating for bold visions, clear plans and secrets that will take you from zero to the moon.

So what is causing the discrepancy between these two stories? Are they giving the opposite advice? And if yes, which one is more actionable?

The most realistic explanation seems to be that these two stories are made for different audiences and have different uses and goals. Jessica Livingston’s book is a great example of a book that works well as a resource and a list of ‘historical’ accounts. The stories are small, the interviews informal and founders are in good company with sharing details of what happened to them. This also makes sense post factum, the book is after all only number 181,514 on Amazon’s list of bestselling books. The core audience are future founders who are interested in the nitty gritty of previous companies that worked out (as well as some that didn’t).

As for Thiel, in this case he is creating a narrative, tied in with mysteries and secrets. The goal of this book is more to encourage and motivate people than to give accurate advice for how to start a company. Funny enough this is in line with university education in general. Here he is spinning the high level narrative, the grounding story littered with interesting ‘mental tools’ as well as an empowering push for creating companies that are aggressively innovative. This framing of technically spiced ideas pumped with a strong ‘definite optimism’ does in fact pay off. The book was made to be a bestseller. And best sell it did. Both on the NY Times list, as well as Amazon where it’s currently at number 1,706 in the global list.

Perhaps to put it another way, Thiel is giving the advice he is incentivised to give as a venture capitalist. As outcomes from startups are very skewed, there will be a few very large winners. Hence knowing your primary audience are Stanford students it makes sense to guide them towards more crazy ideas and high impact ideas.

So in effect Thiel is encouraging people to do crazier things.This is great! There are so many new things to be built! However it needs to be coupled with the correct frame of idea iteration in order to make it actionably useful for startup founders.

How some SaaS startups are built

In reality the way some highly successful startups are built is via iterating through ideas and quickly killing the ones that don’t work. Many stories by founders are laid bare in Jessica Livingston’s Founders at Work (as the one mentioned above with Max Levchin), in these two videos of Peter Reinhardt talking about their experience with Segment as well as in the Twitch journey. Their process looks something like this:

1. Find a team of people who will stick together for a long time
2. Figure out an initial defendable idea to raise seed funding with
3. Iterate in the space until you find the specific product that users really want. This means:
a. Talk to customers to understand what they need
b. Build product after product quickly
c. See if there is change in the demand for this product (ie are your metrics going haywire?)
d. Repeat. This is the hard part where many companies die. Possible reasons of death are running out of money and cofounder relations
4. Once there is a product that satisfies the need of the core group of customers, raise Series A and ramp up sales

So is this story better than the one told by Thiel? Obviously one could just say that the points outlined above are the backbone of another narrative. That is entirely correct. Just as most narratives this also has it’s positive aspects (it’s more actionable than the high level motivational story told by Thiel) as well as it’s shortcomings (doesn't generalise to bio and hardware). So adjust your seat and figure out which stories are useful for you and which ones aren’t.