What the smartest people do on the weekend is what everyone else will do during the week in ten years

Many breakthrough technologies were hatched by hobbyists in garages and dorm rooms. Prominent examples include the PC, the web, blogs, and most open source software.

The fact that flip-flop wearing hobbyists spawn large industries is commonly viewed as an amusing eccentricity of the technology industry. But there is a reason why hobbies are so important.

Business people vote with their dollars, and are mostly trying to create near-term financial returns. Engineers vote with their time, and are mostly trying to invent interesting new things. Hobbies are what the smartest people spend their time on when they aren’t constrained by near-term financial goals.

Today, the tech hobbies with momentum include: math-based currencies like Bitcoin, new software development tools like NoSQL databases, the internet of things, 3D printing, touch-free human/computer interfaces, and “artisanal” hardware like the kind you find on Kickstarter.

It’s a good bet these present-day hobbies will seed future industries. What the smartest people do on the weekends is what everyone else will do during the week in ten years.

“Meaningful” startups

There is generally a lot of enthusiasm in the startup world these days. But some observers worry that too many startups are working on “features” instead of world-changing ideas. Founders Fund published a provocative article summed up by the subtitle: “We wanted flying cars, instead we got 140 characters”. Alexis Madrigal writes in The Atlantic that “we need a fresh paradigm for startups”, and dismisses the significance of recent “hot” startups:

What we’ve seen have been evolutionary improvements on the patterns established five years ago. The platforms that have seemed hot in the last couple of years — Tumblr, Instagram, Pinterest — add a bit of design or mobile intelligence to the established ways of thinking.

One thing these critics need to be careful about is that, as Clay Christensen has long argued, many important new inventions start out looking like toys. Twitter (Founder Fund’s headline example of a “trivial” startup) started out looking like a toy but has since transformed the way information is distributed for tens of millions of people. Madrigal dismisses cloud computing as “a rebranding of the Internet” whose only effect has been to make “the lives of some IT managers easier,” overlooking that cloud-based services solve the “third party payer” problem of enterprise sales, thereby completely changing how enterprises adopt new technology.

That said, I generally agree with the sentiment that the startup world is too focused on chasing trends. I don’t think this is the fault of entrepreneurs. I meet entrepreneurs all the time who are working on ideas that seem quite meaningful to me. Some of them are building futuristic new technologies. Some are trying to disintermediate incumbents and thereby restructure large industries. Others are trying to solve stubborn problems in important sectors like education, healthcare, or energy.

The problem I encounter is that many of these “meaningful” startups have trouble raising money from VCs. An entrepreneur working on groundbreaking robot technology recently joked to me that he’d have an easier time raising money if his robots were virtual and existed only on Facebook. He was only partly joking. His startup will require a lot of capital and doesn’t have an obvious near term acquirer. Only a small group of VCs today will even consider such an investment.

Some lessons learned

Note: Google was kind enough to invite me to give a short talk at their Zeitgeist conference earlier this week. It was a really interesting conference and I got a chance to meet a lot of people I admire. For my talk, I decided to use material from some of my blog posts over the years that I thought might appeal to a broader audience. Unfortunately, I was still recovering from a nastly cold/flu so I didn’t deliver the talk as well as I’d like.  Below is the text.

Today, I wanted to talk about some of the most important lessons I’ve learned over the years from my experiences as an investor and entrepreneur.

1. If you aren’t getting rejected on a daily basis, your goals aren’t ambitious enough

My most humbling and educational career experience was when I was starting out in the tech world.  I applied to literally hundreds of jobs:  low-level VC roles, startup jobs, and various positions at big tech companies.  I had an unusual background: I was a philosophy undergrad and a self-taught programmer. I got rejected from every single job I applied to.

The reason this experience was so useful was that it helped me to develop a thick skin.  I came to realize that employers weren’t really rejecting me as a person or on my potential – they were rejecting a resume.  As the process became depersonalized, I became bolder in my tactics. Eventually, I landed a job that led to my first startup getting funded.

One of the great things about looking for a job is that your payoff is almost entirely a max function – the best of all outcomes – not an average. This is also generally true for lots of activities startups do: raising money, creating partnerships, hiring, marketing and so on.

So, every day – to this day – I make it a point of trying something new and ambitious and getting rejected.

2. Don’t climb the wrong hill

I spend a lot of time trying to recruit people to startups, and I’m surprised how often I see smart, ambitious people who get stuck in fields they don’t like because they sense they are making incremental, day-to-day progress.

I think a good analogy for escaping this trap can be found in computer science, in what are known as hill climbing algorithms. Imagine a landscape with hills of varying heights.  You are dropped randomly somewhere on the landscape. How do you find the highest point?

The lure of the current hill is strong.  There is a natural human tendency to make the next step an upward one.  People fall for a common trap highlighted by behavioral economists:  they tend to systematically overvalue near term over long term rewards.

This effect seems to be even stronger in more ambitious people. Their ambition seems to make it hard for them to forgo the nearby upward step.

The lesson from computer science is: meander some in your walk (especially early on), randomly drop yourself into new parts of the terrain, and when you find the highest hill, don’t waste any more time on the current hill no matter how much better the next step up might appear.

3. The next big thing will start out looking like a toy

A majority of the top internet companies a decade ago are barely in existence today.  How did this happen?  These companies weren’t complacent – they were run by smart executives who were constantly aware that they could lose their lead.

The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a toy.  This is one of the main insights of Clay Christensen’s “disruptive technology” theory, which has been widely studied but I think is still rarely applied because it is so counter-intuitive to conventional management practices.

Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” their users’ needs. The first telephone could only carry voices a mile or two. The leading incumbent of the time, Western Union, chose not to acquire telephone technology because they didn’t see how it could be useful to businesses and railroads – their best customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve. The same was true of how mainframe companies viewed the PC, and how modern telecom companies viewed Skype.

The list of top internet companies in 10 years will look very different than that same list does today. And the new ones on the list will be companies that snuck by the incumbents because people dismissed them as toys.

4. Predicting the future of the Internet is easy: anything it hasn’t yet dramatically transformed, it will.

The Internet has gone through fits and starts – a bubble, a crash, and now a revival.  Pundits are speculating that another crash is coming. Regardless of what happens in the near term, what we do know is that every year we will continue to see more and more industries succumb to the transformational power of the Internet.

Already transformed: music, news, advertising, telecom. Being transformed: finance, commerce, TV & movies, real estate, politics & government. Soon to be transformed: healthcare, education, and energy, among others.

Thus far the US has led Internet innovation. There are things the US can do to keep this lead, including: exporting the entrepreneurial ethos of Silicon Valley to the rest of the country, and allowing talented people to go where their skills are most needed – for example by changing US immigration policies.

Most importantly, we have too many people pursuing careers in banking, law and consulting. I personally encounter this bias all the time when I go to college campuses to recruit for startups. We need to convince the upcoming generation to innovate and take risks in sectors that have a direct impact on the quality of peoples’ lives.

So my advice is:
1) get rejected more
2) climb the right hill
3) create an amazing toy
4) grow that toy into something big that transforms an important industry

The next big thing is sitting right in front of you

When I started grad school in 2001, every student was given an online “classcard”. Classcards were kind of a hybrid of modern-day LinkedIn and Facebook profiles. They were mostly static: no feed or status updates or any other advanced features that we are all accustomed to now. But they were wildly popular. Students spent countless hours browsing them. At one point there was a rumor that people could see who was viewing their classcard and everyone freaked out that their snooping would be revealed. When you met other students you no longer needed to ask for their contact info or background since it was easy to search for their classcard. It completely changed student interactions.

During that time, I was spending most of my personal time trying to develop new startup ideas. I ended up co-founding an online marketing company during school and then after school co-founding other companies (SiteAdvisor, Hunch, Founder Collective). Meanwhile, Facebook – the best internet business of the decade – was being hatched. Its first version looked a lot like classcards, and perhaps it wasn’t a coincidence that it was founded just down the street at the same university. The “toy” I was staring at every day was actually a much better business than all the “serious” ideas I spent so much time working on.

The next big thing will start out looking like a toy

One of the amazing things about the internet economy is how different the list of top internet properties today looks from the list ten years ago.  It wasn’t as if those former top companies were complacent – most of them acquired and built products like crazy to avoid being displaced.

The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a “toy.”  This is one of the main insights of Clay Christensen’s “disruptive technology” theory. This theory starts with the observation that technologies tend to get better at a faster rate than users’ needs increase. From this simple insight follows all kinds of interesting conclusions about how markets and products change over time.

Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs. The first telephone could only carry voices a mile or two. The leading telco of the time, Western Union, passed on acquiring the phone because they didn’t see how it could possibly be useful to businesses and railroads – their primary customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve (technology adoption is usually non-linear due to so-called complementary network effects). The same was true of how mainframe companies viewed the PC (microcomputer), and how modern telecom companies viewed Skype. (Christensen has many more examples in his books).

This does not mean every product that looks like a toy will turn out to be the next big thing. To distinguish toys that are disruptive from toys that will remain just toys, you need to look at products as processes. Obviously, products get better inasmuch as the designer adds features, but this is a relatively weak force. Much more powerful are external forces: microchips getting cheaper, bandwidth becoming ubiquitous, mobile devices getting smarter, etc. For a product to be disruptive it needs to be designed to ride these changes up the utility curve.

Social software is an interesting special case where the strongest forces of improvement are users’ actions. As Clay Shirky explains in his latest book, Wikipedia is literally a process – every day it is edited by spammers, vandals, wackos etc., yet every day the good guys make it better at a faster rate. If you had gone back to 2001 and analyzed Wikipedia as a static product it would have looked very much like a toy. The reason Wikipedia works so brilliantly are subtle design features that sculpt the torrent of user edits such that they yield a net improvement over time. Since users’ needs for encyclopedic information remains relatively steady, as long as Wikipedia got steadily better, it would eventually meet and surpass user needs.

A product doesn’t have to be disruptive to be valuable. There are plenty of products that are useful from day one and continue being useful long term. These are what Christensen calls sustaining technologies. When startups build useful sustaining technologies, they are often quickly acquired or copied by incumbents. If your timing and execution is right, you can create a very successful business on the back of a sustaining technology.

But startups with sustaining technologies are very unlikely to be the new ones we see on top lists in 2020. Those will be disruptive technologies – the ones that sneak by because people dismiss them as toys.