“There’s just a tremendous amount of craftsmanship in between a great idea and a great product”

Steve Jobs in 1995:

There’s just a tremendous amount of craftsmanship in between a great idea and a great product. And as you evolve that great idea, it changes and grows. It never comes out like it starts because you learn a lot more as you get into the subtleties of it. And you also find there are tremendous tradeoffs that you have to make. There are just certain things you can’t make electrons do. There are certain things you can’t make plastic do. Or glass do. Or factories do. Or robots do.

Designing a product is keeping five thousand things in your brain and fitting them all together in new and different ways to get what you want. And every day you discover something new that is a new problem or a new opportunity to fit these things together a little differently.

This is why almost all successful startups have founders who understand business, design, and technology. Product development is the process of navigating a maze – not three separate mazes, but a single maze that intersects all these functions. The people navigating the maze need the full authority of the company behind them.

Full stack startups

Many of today’s most exciting startups were tried before in a different form.

Suppose you develop a new technology that is valuable to some industry. The old approach was to sell or license your technology to the existing companies in that industry. The new approach is to build a complete, end-to-end product or service that bypasses existing companies.

Prominent examples of this “full stack” approach include Tesla, Warby Parker, Uber, Harry’s, Nest, Buzzfeed, and Netflix. Most of these companies had “partial stack” antecedents that either failed or ended up being relatively small businesses. The problems with the partial stack approach include:

  • Bad product experience. Nest is great because of deep, Apple-like integration between software, hardware, design, services, etc, something they couldn’t have achieved licensing to Honeywell etc.
  • Cultural resistance to new technologies. The media industry is notoriously slow to adopt new technologies, so Buzzfeed and Netflix are (mostly) bypassing them.
  • Unfavorable economics. Your slice of the stack might be quite valuable but without control of the end customer it’s very hard to get paid accordingly.

The full stack approach lets you bypass industry incumbents, completely control the customer experience, and capture a greater portion of the economic benefits you provide.

The challenge with the full stack approach is you need to get good at many different things: software, hardware, design, consumer marketing, supply chain management, sales, partnerships, regulation, etc. The good news is that if you can pull this off, it is very hard for competitors to replicate so many interlocking pieces.

My guess is we are still at the very beginning of the full stack movement. Many large industries remain relatively untouched by the information technology revolution. That will likely change now that startups have figured out the right approach.

The idea maze

The pop culture view of startups is that they’re all about coming up with a great product idea. After the eureka moment, the outcome is preordained. This neglects the years of toil that entrepreneurs endure, and also the fact that the vast majority of startups change over time, often dramatically.

In response to this pop culture misconception, it has become popular in the startup community to say things like “execution is everything” and “ideas don’t matter”.

But the reality is that ideas do matter, just not in the narrow sense in which startup ideas are popularly defined. Good startup ideas are well developed, multi-year plans that contemplate many possible paths according to how the world changes. Balaji Srinivasan calls this the idea maze:

A good founder is capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of (say) the “movies/music/filesharing/P2P” maze or the “photosharing” maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies that are likely to move walls and change assumptions.

Imagine, for example, that you were thinking of starting Netflix back when it was founded in 1997. How would content providers, distribution channels, and competitors respond? How soon would technology develop to open a hidden door and let you distribute online instead of by mail? Or consider Dropbox in 2007. Dozens of cloud storage companies had been started before. What mistakes had they made? How would incumbents like Amazon and Google respond? How would new platforms like mobile affect you?

When you’re starting out, it’s impossible to completely map out the idea maze. But there are some places you can look for help:

1) History. If your idea has been tried before (and almost all good ideas have), you should figure out what the previous attempts did right and wrong. A lot of this knowledge exists only in the brains of practitioners, which is one of many reasons why “stealth mode” is a bad idea. The benefits of learning about the maze generally far outweigh the risks of having your idea stolen.

2) Analogy. You can also build the maze by analogy to similar businesses. If you are building a “peer economy” company it can be useful to look at what Airbnb did right. If you are building a marketplace you should understand eBay’s beginnings. Etc.

3) Theories. There are now decades of historical data on tech startups, and smart observers have sifted through to develop theories that generalize that data. Some of these theories come from academia (e.g. Clay Christensen) but increasingly they come from investors and entrepreneurs on blogs.

4) Direct experience. A lot of good startup founders figure out the maze through direct experience, often at work. The key here is to put yourself in interesting mazes and give yourself time to figure it out.

The metaphor of a maze also helps you think about competition. Competition from other startups is usually just a distraction. In all likelihood, they won’t take the same path, and the presence of others in your maze means you might be onto something. Your real competition – and what you should worry about – is the years you could waste going down the wrong path.

Hardware startups

For a long time, entrepreneurs and investors shied away from hardware. This seems to be changing. As Paul Graham says, there are many reasons for this:

Hardware does well on crowdfunding sites. The spread of tablets makes it possible to build new things controlled by and even incorporating them. Electric motors have improved. Wireless connectivity of various types can now be taken for granted. It’s getting more straightforward to get things manufactured. Arduinos, 3D printing, laser cutters, and more accessible CNC milling are making hardware easier to prototype. Retailers are less of a bottleneck as customers increasingly buy online.

Another important factor is what Chris Anderson calls “the peace dividend of the smartphone war”:

All the components in a smartphone — the sensors, the GPS, the camera, the ARM core processors, the wireless, the memory, the battery — all that stuff, which is being driven by the incredible economies of scale and innovation machines at Apple, Google, and others, is available for a few dollars. They were essentially “unobtainium” 10 years ago. This is stuff that used to be military industrial technology; you can buy it at RadioShack now.

It also doesn’t hurt that the most valuable company in the world (Apple) and some of the most exciting startups (e.g., Nest, Jawbone, Leap Motion) make hardware.

If you are thinking of doing a hardware startup, here are a few things to keep in mind:

Manufacturing. Many hardware startups stumble when they try to go from prototype to large-scale manufacturing. There is no AWS-equivalent for hardware. To get manufacturing right, entrepreneurs often end up living in China for months and even years. The difficulty of manufacturing is one reason that hardware entrepreneurs tend to have more work experience than software entrepreneurs.

Defensibility. Hardware companies generally have economies of scale but hardware products generally don’t have network effects. This means that as soon as you prove the market, you’ll face competition from lower cost manufacturers. The best startups complement hardware with software and services that have network or platform effects. Think of hardware as bringing the revenue and software/services as bringing the margin.

Planning. The build-test-iterate model that is popular in software startups doesn’t translate well to hardware startups. Proper planning is essential because mistakes can be unrecoverable. For example, you might create a design that fails environmental tests but only discover this years later when you are about to go to market. (See all those symbols on the back of your phone? Those are regulatory certifications).

B2C vs B2B. Consumer hardware tends to get more attention, but B2B hardware has a number of advantages. You’ll have fewer startup competitors, because entrepreneurs who have both hardware and business domain expertise are rare. You’ll also have fewer incumbent competitors, because B2B hardware usually requires local sales and service teams, making it harder for foreign competitors to copy you. Finally, manufacturing can be done locally because higher price points mean you can be less sensitive to labor costs.

Some problems are so hard they need to be solved piece by piece

Andrew Parker had a great post a few years ago where he sketched out all the startups going after pieces of Craigslist:

Startups that have tried to go head-to-head against the entirety of Craigslist (the “horizontal approach”) have struggled. Startups that have tried to go up against pieces of Craigslist (the “vertical approach”) have been much more successful (e.g. StubHub, AirBnB).

Recruiting looks like it’s going through a similar evolution. Last-generation products like LinkedIn are broad but not deep. Everyone I know who recruits uses LinkedIn, but none of them think it has solved their recruiting problems. Now we are seeing the rise of vertical solutions that are significantly better, e.g. Stack Overflow for developers and Behance for designers (at least that’s what I believe – I’m an angel investor in both).

The benefits of focusing are: 1) you can create a dramatically better user experience when it’s tailored to a specific use, 2) you can do unscalable hacks when starting out (e.g. AirBnb paying photographers to take pictures of apartments), 3) you need far fewer users to get to minimum viable liquidity, and 4) brand building is easier when you solve a straightforward, narrow problem (e.g. “I need a place to stay this weekend”).

This pattern – horizontal first, vertical second – is common. But you need to be careful. Back in 2003-2004, there was a lot of speculation that vertical search engines would eventually take down Google. A few categories worked (e.g. travel), but Google adapted in other categories (e.g. video, news) and lots of startups suffered.