Fantastic Unicorns and Where to Find Them

As a venture scout and as someone who loves helping pre-seed/seed startups before they get to the A, I get asked this one question more often than I expect. “David, do you think this is a good idea?” Most of the time, admittedly, I don’t know. Why? I’m not the core user. I wouldn’t count myself as an early adopter who could become a power user, outside of pure curiosity. I’m not their customer. To quote Michael Seibel of Y Combinator,

… “customers are the gatekeepers of the startups world.” Then comes the question, if customers are the gatekeepers to the venture world, how do you know if you’re on to something if you’re any one of the below:

• Pre-product,
• Pre-traction,
• And/or pre-revenue?

This blog post isn’t designed to be the crystal ball to all your problems. I have to disappoint. I’m a Muggle without the power of Divination. But instead, let me share 3 mental models that might help a budding founder find idea-market fit. Let’s call it a tracker’s kit that may increase your chances at finding a unicorn.

1. Frustration
2. The highly fragmented industry with low NPS
3. Right on non-consensus

1. Frustration

Jeff Bezos famously said, “Your margin is my opportunity.” Similarly, when people are frustrated with a process in their life, they’re forced to meet reality where reality is at. As a founder, if you can bring reality to where your customers no longer have to find ways to circumvent it, then you’ve got something in the bag. Go to where people are frustrated.

Where are people complaining?

What are they complaining about?

Taking it a step further, where have they spent time in the idea maze? Have they come up with “hacks” to circumvent their frustration?

Find where people are sharing their niche hacks on:

• Quora,
• Facebook groups,
• Slack groups,
• Subreddits (i.e. r/LifeProTips)
• Forums
• Where you’ve had to come up with tips/tricks yourself,
• Where you or others you know are using many products/services to accomplish just one task. My general rule of thumb is if # of products used for solution > # of hours spent finding solution, then I’m frustrated.
• And I’m sure there’s many I haven’t even heard or thought of.

For example, because the large social networks’ algorithm has made gaining traction as a budding content creator extremely difficult, the concept of podding was created. YouTube, Instagram, Facebook, you name it, allows content that gain a certain number of likes, comments, and shares within a set time period to surface higher on others’ newsfeed. New content creators found it hard to gain visibility with their limited number of followers in a saturated space prioritizes users with more of a following. The winners just kept winning. So, podding came about. Facebook and Instagram groups with the sole purpose of collectively gaming the social media algorithm.

2. The highly fragmented industry with low NPS

In the theme of frustration, here’s another way to look at it. Keith Rabois of Founders Fund tweeted 3 years ago:

NPS, or net promoter score, is a measure of how likely someone is to recommend your product. Some industries, unfortunately, have terrible NPS scores, like health plans, TV services, and rental car agencies. And apparently, corporate learning and development has an NPS of -8, according to a Deloitte study on the LMS markets. Ya, who woulda thunk? Packy McCormick, who writes the brilliant Not Boring newsletter, takes that same rationale and applies it in his SkillMagic investment memo. I’m not an investor in SkillMagic, a SaaS product that trains teams “with magical simplicity”, nor am I suggesting you to invest in his syndicate, but analysis-wise, it’s a damn good breakdown. Speaking of amazing investment memos, Bessemer Venture Partners recently publicized some of their investment memos on investments like LinkedIn, Shopify, Twitch, and more.

Equally so, you’re looking for heavily fragmented industries, where there isn’t a monopoly or a duopoly. Some VCs call it “being allergic to competition”. Look for industries that overlooked or underestimated.

3. Right on non-consensus

It’s not the first time I’ve cited Andy Rachleff, co-founder of Wealthfront and Benchmark Capital, and it certainly won’t be the last. “You want to be right on the non-consensus.” He uses this 2×2 matrix for to understand if a revolutionary idea has the potential to change the world or not.

As a founder, you’re pursuing the margins. As Jeff Bezos said and I alluded to at the beginning, the opportunity. You don’t want to be tapping into red oceans, as we call it in venture. An ocean filled with the blood of existing competitors and incumbents. If you’re trying to create a revolutionary product, I wouldn’t recommend looking here. You’re looking for a blue ocean, one that hasn’t been stained by (heavy) competition yet.

As I wrote in a post last year, when validating startup ideas, you don’t want consensus. If your idea is truly revolutionary, people have yet to be conditioned to accept the idea. Take Uber or Airbnb, for example. If you asked the average person in 2008 if they would use either of the two, most would have thought that you’d be crazy to have a stranger sharing a car ride or home with them. Or, take e-sports or streaming. If someone told me in my pre-teen days that I could make a living off of playing video games, I’d most likely think I was dreaming. After all, I grew up playing Snake on my dad’s Motorola Razr, which admittedly seems to have made a return to the markets.

And that means you have to start niche before you go for what can be popular. Prioritize depth over breadth. In that deep dive, in your niche, find your “earned secret“, as Shawn Xu, his colleagues at Floodgate, Ben Horowitz, and many others in VC call it.

And once you’d found that earned secret, you can begin to fathom scale by expanding into adjacent markets, with Bangaly Kaba‘s Adjacent User Theory. If you’re curious on how to scale, I write more about it here.

In closing

Regardless of where your idea comes from, always test, test, and test. Test which channels work the best for your business (i.e. performance marketing, virality, or content).

Types of customer acquisition channels	Examples
Performance marketing	FB/Google ads, billboards
Virality	Word-of-mouth, referrals, invites
Content	SEO, YouTube, blog, podcast

At the end of the day, a business’s value comes from the quality of execution rather than the quality of the idea. Dan Hockenmaier and Lenny Rachitsky wrote an amazing acquisition channel analysis on the First Round Review on how to know which channels to prioritize for which kinds of businesses.

Once you’ve acquired these customers, test if your product is something that actually solves a fundamental problem for them. Have you made a lovable product? You’ve gotten their reason to come down, but what is their reason to stay? Are they sticking around (even if your product is buggy)? Are they proactively reaching out and offering product feature suggestions? And maybe, as you grow, do they also write you handwritten love letters on how awesome your product is?

When you finally hit product-market fit, you’ll know. Or rather you won’t have time to worry if your idea is good or not anymore.

Photo by Marco Secchi on Unsplash

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