When should you give up on an idea?

Suppose you launch your new startup and don’t get the traction you were hoping for. How do you know whether to give up or keep going? This is a tough question. There are lots of examples that support seemingly contradictory theories. Instagram pivoted before launch, and Pinterest refused to pivot for years. Many other startups pivoted too early or kept working on dead-end ideas for too long.

If the pre-product/market-fit phase of a startup is about efficiently testing hypotheses, then continuing to test an idea only makes sense if you have a strong theory about what has gone wrong and how things will improve.

Specifically, you should have a theory about: 1) how to modify your product, 2) how to modify your marketing/distribution strategy, and/or 3) how external events (a new technology wave, cultural events, regulatory change, etc) might make your product take off. In other words, you need a plausible argument as to why the future will be different than the past.

Another way to think about this is using what Jeff Bezos calls the “regret-minimization framework.” Imagine you do give up on your idea. Have you explored most of its plausible implementations? Are you confident that another entrepreneur won’t come along and make it work? You’ll regret it more if you nearly created a big company than if you spent an extra six months iterating.

Finally, beware of the temptation to get distracted by new shiny ideas. When you are deep in the weeds, new ideas seem refreshing but this is usually the false signal of “uninformed optimism” that accompanies all new things.


The default state of a startup is failure

If you are starting a company and wondering why nothing good seems to happen unless you force it to happen, that’s because the world wants to stay the way it is. Customers, partners, and most of all incumbents don’t want to think hard, try new things, or change in any way. The world is lazy and just wants to keep doing what it’s doing.

A friend of mine got a job at a big company and was shocked to see his colleagues worked just a few productive hours a day. They didn’t seem to care about their work or have relevant expertise. My friend said: “Wow, this company is going under.” Then the company released its quarterly reports and profits rose to an all-time high. The momentum of the company’s brand and relationships was sufficient to propel it forward.

On the flip side, first-time entrepreneurs often fail to realize that when you build something new, no one will care. People won’t use your product, won’t tell people about it, and almost certainly won’t pay for it. (There are exceptions – but these are as rare as winning the lottery). This doesn’t mean you’ll fail. It means you need to be smarter and harder working, and surround yourself with extraordinary people.

The default state of the world is to stay the way it is, which means the default state of a startup is failure.

The myth of the overnight success

Angry Birds was Rovio’s 52nd game. They spent eight years and almost went bankrupt before finally creating their massive hit. Pinterest is one of the fastest growing websites in history, but struggled for a long time. Pinterest’s CEO recently said that they had “catastrophically small numbers” in their first year after launch, and that if he had listened to popular startup advice he probably would have quit.

You tend to hear about startups when they are successful but not when they are struggling. This creates a systematically distorted perception that companies succeed overnight. Almost always, when you learn the backstory, you find that behind every “overnight success” is a story of entrepreneurs toiling away for years, with very few people except themselves and perhaps a few friends, users, and investors supporting them.

Startups are hard, but they can also go from difficult to great incredibly quickly. You just need to survive long enough and keep going so you can create your 52nd game.


Size markets using narratives, not numbers

Anyone who has pitched VCs knows they are obsessed with market size.  If you can’t make the case that you’re addressing a possible billion dollar market, you’ll have difficulty getting VCs to invest. (Smaller, venture-style investors like angels and seed funds also prioritize market size but are usually more flexible – they’ll often invest when the market is “only” ~$100M).  This is perfectly rational since VC returns tend to be driven by a few big hits in big markets.

For early-stage companies, you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends. Good VCs understand this. Bad VCs don’t, and waste time on things like interviewing potential customers and building spreadsheets that estimate market size from the bottom-up.

The only way to understand and predict large new markets is through narratives. Some popular current narratives include: people are spending more and more time online and somehow brand advertisers will find a way to effectively influence them; social link sharing is becoming an increasingly significant source of website traffic and somehow will be monetized; mobile devices are becoming powerful enough to replace laptops for most tasks and will unleash a flood of new applications and business models.

As an entrepreneur, you shouldn’t raise VC unless you truly believe a narrative where your company is a billion dollar business. But deploying narratives is also an important tactic. VCs are financiers — quantitative analysis is their home turf. If you are arguing market size with a VC using a spreadsheet, you’ve already lost the debate.